RRC Publications by Priority Research Area

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Social Security and Retirement

Are Age-62/63 Retired Worker Beneficiaries At Risk?

by Eric R. Kingson and Maria T. Brown
SSA Project # BC08-06 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2009-13

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This paper provides a longitudinal view, spanning 10 to 12 years, of persons first accepting retired worker benefits at ages 62 or 63 in 1994 or 1996. Using HRS data, matched to Social Security administrative files, we present: 1) findings of variation in income, wealth, health insurance coverage and employability, along such dimensions as race, Hispanic ethnicity, gender, reported health status and functional ability; 2) findings of economic, health and survival outcomes in 2006 for the 1994/1996 pooled sample, paying special attention to variations within the sub-sample of persons who accepted Social Security early retirement benefits by 1996; and 3) estimates of the proportion of persons accepting such benefits who are at risk. The findings indicate that persons first accepting Social Security retired worker benefits at ages 62 and 63 experience varying degrees of risk to their well being at these ages, and that these risks condition their well-being in retirement and survival probabilities. The major policy implication is that consideration should be given to providing a health insurance option for persons first accepting retired worker benefits prior to age 65. The major research implication is that retirement researchers should consider utilizing a range of measures—as opposed to a singular and potentially narrow measure—of risk when assessing the magnitude of risks existing for those accepting retired worker benefits at early ages.

The Costs and Consequences of Perceived Political Uncertainty in Social Security

by Erzo F. P. Luttmer and Andrew A. Samwick
SSA Project # NB11-11 • Social Security and Retirement
National Bureau of Economic Research

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Households approaching retirement face political uncertainty in their retirement opportunities due to the long-term actuarial deficit in the Social Security program. We field an original internet survey to analyze the impact of this uncertainty on household welfare and behavior. On average, our survey respondents expect only about 60 percent of the benefits they are supposed to get under current law. We document the wide variation around the expectation for most respondents and the heterogeneity in the perceived distributions of future benefits across respondents. This uncertainty has real costs. Our central estimates show that on average households would be willing to forego 4–6 percent of the benefits they are supposed to get under current law to remove the political uncertainty associated with their future benefits. However, responses to hypothetical questions about behavior in the absence of political uncertainty do not suggest that respondents are engaged in precautionary behavior due to the uncertainty.

Deconstructing Lifecycle Expenditure

by Mark Aguiar and Erik Hurst
SSA Project # UM08-06 • Social Security and Retirement
Michigan Retirement Research Center Working Paper 2008-173

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In this paper we revisit two well-known facts regarding lifecycle expenditures. The first is the familiar "hump" shaped lifecycle profile of nondurable expenditures. We document that the behavior of total non-durables masks surprising heterogeneity in the lifecycle profile of individual sub-components. We find, for example, that while food expenditures decline after middle age, expenditures on entertainment continue to increase throughout the lifecycle. These patterns pose a challenge to familiar lifecycle models that emphasize inter-temporal substitution or movements in income, including standard models of precautionary savings, myopia, and limited commitment. Secondly, we document that the increase in the cross-sectional dispersion of expenditure over the lifecycle is not greater for luxuries. In particular, the dispersion in entertainment expenditure declines relative to food expenditures as households become older, casting further doubt on theories that emphasize (exclusively) shocks to permanent income. We propose and test a Beckerian model that emphasizes intra-temporal substitution between time and expenditures as the opportunity cost of time varies over the lifecycle. We find this alternative model successfully explains the joint behavior of food and entertainment expenditures in the latter half of the lifecycle. The model, however, is less successful in explaining expenditure patterns during the early half of the lifecycle.

The Distributional Effects of the Social Security Windfall Elimination Provision

by Jeffrey R. Brown and Scott J. Weisbenner
SSA Project # NB08-05 • Social Security and Retirement
National Bureau of Economic Research

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Millions of federal, state and local government employees have lifetime earnings that are divided between employment that is covered by the Social Security system and employment that is not covered. Because Social Security benefits are a non-linear function of covered lifetime earnings, the simple application of the standard benefit formula to covered earnings only would provide a higher replacement rate on those earnings than is appropriate given the individuals' total (covered plus uncovered) lifetime earnings. The Windfall Elimination Provision (WEP), established in 1983, is intended to correct this situation by applying a modified benefit formula to earnings of individuals with non-covered employment. This paper analyzes the distributional implications of the WEP, and finds that it reduces benefits disproportionately for households with lower lifetime covered earnings. It discusses an alternative method of calculating the WEP that preserves the intended redistribution of the system. In recognition of the data limitations that prevent this alternative method from being used by SSA for at least another decade, the paper also analyzes two alternative ways of calculating the WEP that use the same information that SSA currently uses, are budget neutral, and come closer to maintaining the cross-sectional progressivity of Social Security than does the existing WEP formula.

Do Stronger Age Discrimination Laws Make Social Security Reforms More Effective?

by David Neumark and Joanne Song
SSA Project # UM11-15 • Social Security and Retirement
Michigan Retirement Research Center Working Paper 2011-249

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Numerous Social Security reforms have been implemented to increase employment of those who would otherwise retire, including raising the full retirement age (FRA) from 65 to 67. These supply-side reforms may be frustrated, however, if age discrimination poses barriers to older workers remaining employed or finding new jobs. This study asks whether policies to reduce age discrimination can enhance the impact of Social Security reforms, focusing on the impact of increases in the FRA on benefit claiming and employment. We find that in states with stronger age discrimination protections, older individuals were more responsive to increases in the FRA. Specifically, where the state laws applied to small firms not covered by the ADEA, employment increased more for older individuals for whom the FRA increased. And where the state laws provided stronger remedies (harsher penalties), employment of these older individuals increased more and Social Security benefit claiming fell by more. Because benefits taken before the FRA are actuarially adjusted, whether or not workers claim benefits before the FRA may have little impact on the financial solvency of Social Security. However, if people work longer, they pay taxes into the system for a longer period, which has beneficial financial implications. More generally, the evidence suggests that enhanced incentives for older individuals to remain in the workforce—whether in the form of the second scheduled round of increases in the FRA, or other changes—will be more effective if public policy reduces demand-side barriers to the employment of older workers that stem from discrimination.

Early Retirement, Labor Supply, and Benefit Withholding: The Role of the Social Security Earnings Test

by Hugo A. Benítez-Silva and Frank Heiland
SSA Project # UM08-09 • Social Security and Retirement
Michigan Retirement Research Center Working Paper 2008-183

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The labor supply and benefit claiming incentives provided by the early retirement rules of the Social Security Old Age benefits program are of growing importance as the Normal Retirement Age (NRA) increases to 67, the labor force participation of Older Americans rises and a variety of reforms to the Social Security system are considered. Any reform needs to take into account the effects and rationale of the Social Security Earnings Test and the Actuarial Adjustment Factor. We describe these incentives, and emphasize that individuals who claim benefits before the NRA but continue to work, or return to the labor force, can reduce the early retirement penalty by suspending the collection of monthly benefits if they earn above the Earnings Test limit. We analyze benefit withholding patterns using data from the Master Beneficiary Files of the Social Security Administration, and present descriptive and exploratory evidence on the determinants of benefit withholding using data from the Health and Retirement Survey. We then investigate the importance of the Earnings Test limits for work and claiming behavior using a dynamic life-cycle model of labor supply, benefit claiming, and withholding. We use the latter framework to compare the consequences of a number of changes to the Earnings Test provision for the labor supply behavior and earnings of older Americans.

The Effect of Labor Market Trends on the Incentives and Incidence for Claiming Social Security Benefits Early

by Till von Wachter
SSA Project # NB09-06 • Social Security and Retirement
National Bureau of Economic Research

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This study examines the effect of incentives to claim Social Security benefits early originating in the labor market. Using synthetic matched survey and administrative data, we find that Social Security benefits replaced an increasing fraction of the earnings of less educated workers in the 1990s. Exploiting variation in replacement rates at the level of year and education groups, we then show that these increases in replacement rates have contributed significantly to the contemporaneous decline in the Social Security claiming ages of less educated workers. We argue further that the rise in replacement rates can be explained to a significant extent by an increase in earnings inequality over this period. Looking forward, trends in earnings inequality are likely to lead to continuing increases in the income replacement rate of Social Security for less educated workers in the future. Thus, our regression estimates suggest that average claiming ages may decline still further in the future as well. We also examine a second channel through which labor market trends affect early claiming, the rise and decline in educational attainment across cohorts. On this issue, we find that that despite significant differences in claiming behavior between higher and lower educated workers, a slowdown in the educational attainment among workers eligible to claim OASI benefits is unlikely to have a strong effect on future claiming ages. Trends in earnings inequality are found to have a much larger impact on claiming behavior than trends in education.

The Effects of Changes in Women's Labor Market Attachment on Redistribution Under the Social Security Benefit Formula

by Alan L. Gustman
SSA Project # UM11-06 • Social Security and Retirement
Michigan Retirement Research Center Working Paper 2011-248

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Studies using data from the early 1990s found that the progressive Social Security benefit formula is much less successful in redistributing benefits from households with high earnings to households with low earnings than it is in redistributing from individuals with high to low earnings. Wives often earned much less than their husbands. As a result, much of the redistribution at the individual level was effectively from high earning husbands to their own lower earning wives. In addition, spouse and survivor benefits accrue disproportionately to women from high income households. Both factors mitigate redistribution at the household level. This paper compares outcomes for the earlier cohort with those of a cohort born twelve years later. With greater growth in women's earnings, the aim of the study is to see whether the Social Security system now fosters somewhat more redistribution from high to low earning households. Although women enjoyed more rapid growth in labor market activities and earnings than men, we find that the Social Security system remains much less successful in redistributing benefits from households with high covered earnings to those with lower covered earnings than in redistributing benefits from individuals with high covered earnings to those with lower covered earnings. Policy makers must decide whether they are happy with the current level of redistribution of Social Security benefits at the household level, which differs quite substantially from the sharp degree of redistribution suggested by the benefit formula, or whether they would prefer a system that is more, or less, redistributive.

Effects of Legal and Unauthorized Immigration on the U.S. Social Security System

by Hugo Benítez-Silva, Eva Cárceles-Poveda, and Selçuk Eren
SSA Project # UM11-07 • Social Security and Retirement
Michigan Retirement Research Center Working Paper 2011-250

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Immigration is having an increasingly important effect on the social insurance system in the United States. On the one hand, eligible legal immigrants have the right to receive pension benefits, but also rely on other aspects of the social insurance system such as unemployment insurance, health care, disability, and welfare programs, while most of their savings have direct positive effects on the domestic economy. On the other hand, most undocumented immigrants contribute to the system through taxed wages, but they are not eligible for these programs unless they attain legal status, and a majority of their savings translates into remittances which have no effect on the domestic economy. Therefore, to understand the impact of immigrant workers on the economy we have to take into account the decisions and events these individuals face throughout their lives, as well as their use of the government programs. We present an empirically based life-cycle Overlapping Generations model in a General Equilibrium framework which differentiates natives from legal and undocumented immigrants. We study their consumption, savings, labor earnings and social insurance entitlements to analyze their role in the financial sustainability of the system and the growth of the economy. We analyze the consequences for our economy of a policy which allows a proportion of undocumented immigrants to attain legal status. We find significant positive effects of legalization on capital stock, output, consumption levels, labor productivity, and the overall welfare of individuals. While the effects are small in percentage terms, given the size of our economy, the level effects are considerable.

Estimating Work Capacity Among Near Elderly and Elderly Men

by David Cutler
SSA Project # NB09-18 • Social Security and Retirement
National Bureau of Economic Research

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As the population ages, labor force growth will fall, and demand for labor will increasingly have to be met by older workers. At the same time, pressures on Social Security and Medicare finances mean that older people may be required or incentivized to work to older ages—if they are able to do so. The goal of this paper is to measure the work capacity of near elderly and elderly men. First, I show that work capacity declines only slowly through the mid-70s, and then declines more rapidly thereafter. Relative to men in their late 50s, work capacity is about 90 percent as high at age 65, and 70 percent as high at age 75. Second, I estimate that an additional 31 million men between ages 55 and 74 would be working if actual employment tracked changes in predicted work capacity by age. This is roughly 25 percent of the men in that age group and 22 percent of total employment. Thus, the United States could substantially meet a coming demand for workers with increased labor force participation among the 'young elderly.' Third, I compare work capacity across demographic groups, finding that less educated workers have 10–20 percent lower labor force capacity at older ages than better educated workers, on average, and that blacks have 10–15 percent lower work capacity than whites.

Financial Hardship Before and After Social Security's Early Eligibility Age

by Richard W. Johnson and Gordon B.T. Mermin
SSA Project # BC08-02 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2009-8

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Although poverty rates for Americans ages 65 and older have plunged over the past half century, many people continue to fall into poverty in their late fifties and early sixties. This study examines financial hardship rates in the years before qualifying for Social Security retirement benefits at age 62 and investigates how the availability of Social Security improves economic well-being at later ages. The analysis follows a sample of adults from the 1937–39 birth cohorts for 14 years, tracking their employment, disability status, and income as they age from their early 50s until their late 60s. It measures the share of older adults who appear to have been forced into retirement by health or employment shocks and the apparent impact of involuntary retirement on low-income rates. The study also estimates models of the likelihood that older adults experience financial hardship before reaching Social Security's early eligibility age. The results show that the likelihood of experiencing financial hardship increases significantly as people approach Social Security's early eligibility age. The increase in hardship rates is concentrated among workers with limited education and health problems. For example, among those who did not complete high school, hardship rates increase from 23 percent at ages 52 to 54 to 31 percent at ages 60 to 61, a relative increase of 36 percent. Hardship rates decline after age 62, when most people qualify for Social Security retirement benefits. These findings highlight the fragility of the income support system for Americans in their fifties and early sixties.

How Common Is "Parking" Among SSDI Beneficiaries? Evidence from the 1999 Change in the Level of Substantial Gainful Activity (SGA)

by Jody Schimmel, David C. Stapleton, and Jae Song
SSA Project # UM09-02 • Social Security and Retirement
Michigan Retirement Research Center Working Paper 2009-220

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Fewer Social Security Disability Insurance (DI) beneficiaries have their earnings suspended or terminated because of work than those who are actually working, partly because beneficiaries "park" earnings at a level below substantial gainful activity (SGA) to retain benefits. We assess the extent of parking by examining how beneficiary earnings and months off the rolls for work responded to a 1999 change in the SGA level for non-blind beneficiaries from $500 to $700 per month. Specifically, our difference-in-difference analysis compares longitudinal data for two beneficiary cohorts with different incentives to park their earnings; one experienced the increased SGA level the first year after its Trial Work Period (TWP), when beneficiaries can earn any amount without losing benefits, while the two-year-earlier cohort did not. The impact of the increased SGA level is consistent with parking, but its magnitude small. The reduction in TWP completers with earnings less than $500 was 1.0 percentage points, the reduction in the percentage with earnings over $700 was 1.2 percentage points, and the increase for those with earnings between $500 and $700 was 2.2 percentage points. However, there was no change in mean earnings; small increases for those with relatively low earnings were offset by reductions for those with relatively high earnings. The SGA increase had a significant negative effect on the average number of months that beneficiaries were off the rolls for work; the effect was largest?about six-tenths of a month?for those who earned $500 to $700 during in year they completed their TWP.

How Do Subjective Mortality Beliefs Affect the Value of Social Security and the Optimal Claiming Age?

by Wei Sun and Anthony Webb
SSA Project # BC11-03 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2011-22

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Households that delay claiming Social Security are, in effect, making additional purchases of the Social Security annuity. Theoretical calculations show the delayed claiming is optimal, even for high mortality households. Yet most claim well before the theoretically optimal age. This paper investigates whether subjective mortality beliefs contribute to the prevalence of early claiming. The value of delay depends not only on life expectancy, but also on the degree of uncertainty surrounding the age of death. Using data from the Health and Retirement Study, we show that women approaching retirement understate their probabilities of surviving to age 75 by an average of 10 percentage points, whereas men's forecasts are, on average, correct. But both men and women exhibit greater confidence of their ability to forecast their age of death, relative to the predictions of life tables. But these subjective mortality beliefs have little effect on the value of Social Security or the optimal claim age, and cannot explain the prevalence of early claiming. We also find that self-assessed survival probabilities do not predict survival after controlling for health and socio-economic status, indicating a potential for medical underwriting to reduce adverse selection in the annuity market.

How Does Modeling of Retirement Decisions at the Family Level Affect Estimates of the Impact of Social Security Policies on Retirement?

by Alan Gustman and Thomas Steinmeier
SSA Project # UM08-03 • Social Security and Retirement
Michigan Retirement Research Center Working Paper 2008-179

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This paper analyzes how Social Security policies influence the retirement behavior of two earner couples when there is heterogeneity in time preference. Heterogeneity in time preference refers to differences among people in the rate at which they are willing to trade current for future incomes. Heterogeneity in time preference means there are differences among people in the rate at which they are willing to tradeoff between current and future Social Security benefits.

How Does the Personal Income Tax Affect the Progressivity of OASI Benefits?

by Norma B. Coe, Richard Kopcke, and Alicia Munnell
SSA Project # BC11-01 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2011-21

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This project will calculate the impact of federal income taxes on the progressivity of the Old Age and Survivors Insurance (OASI) program, a factor currently omitted from the literature. We will use Health and Retirement Study (HRS) data linked with the Social Security Earnings Records to estimate OASI contributions and benefits for individuals and households, before and after income taxes. We will use these estimates to recalculate the extent to which the OASI program redistributes income. This project will provide information needed to evaluate the net progressivity of the OASI program and to assess the merits of various reform options.

How Much Do Households Really Lose By Claiming Social Security at Age 62?

by Wei Sun and Anthony Webb
SSA Project # BC09-01 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2009-11

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Individuals can claim Social Security at any age from 62 to 70 although most claim at 62 or soon thereafter. Those who delay claiming receive increases that are approximately actuarially fair. We show that expected present value calculations substantially understate both the optimal claim age and the losses resulting from early claiming because they ignore the value of the additional longevity insurance acquired as a result of delay. Using numerical optimization techniques, we illustrate that for plausible preference parameters, the optimal age for non-liquidity constrained single individuals and married men to claim benefit is between 67 and 70. We calculate that Social Security Equivalent Income, the amount by which benefits payable at suboptimal ages must be increased so that a household is indifferent between claiming at those ages and the optimal combination of ages, can be as high as 19.0 percent.

How Much Do State Economic and Other Circumstances Affect Retirement Behavior?

by Alicia H. Munnell, Mauricio Soto, Robert K. Triest, and Natalia A. Zhivan
SSA Project # BC08-16 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2008-12

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Economic conditions and labor force participation vary significantly across the states of the Union. Despite these marked differences, little is known about the reasons for such variations in retirement patterns. Using the Current Population Survey for the period 1977–2007, this paper demonstrates that the differences in the labor force participation of men age 55–64 are related to the labor market conditions, the nature of employment, and the employee characteristics in each state as well as a pseudo replacement rate. These variables explain more than one-third of the total variation. Even moving to a fixed effects model only cuts the explanatory power by half. The question remains, however, whether these relationships reflect different populations or unique aspects of the state. To answer that question we turn to the Health and Retirement Study (HRS). We estimate equations for the probability of working and for the expected retirement for men in their late fifties and early sixties. In each case, the first equation includes just the state-level variables and the second the state-level variables and the HRS demographic and economic information for each individual. The results show that the state-level variables explain almost none of the variation in the probability of working or the expected retirement age, but most of the state-level variables are statistically significant both before and after the inclusion of the HRS information.

Individuals' Responses to Social Security Reform

by Adeline Delavande and Susann Rohwedder
SSA Project # UM08-08 • Social Security and Retirement
Michigan Retirement Research Center Working Paper 2008-182

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The Social Security trust fund is predicted to be depleted by 2041. While there are several viable reform proposals to restore long-term solvency of the Social Security system, one important element that is critical to the success of any reform remains unknown: how will individuals respond to, for example, a cut of their Social Security benefits. Will they work longer or save more or both, and to what extent will their response make up for the cut in benefits? In this paper we use data from the HRS Internet Survey where we asked respondents directly what they would do if everyone's Social Security benefits were cut by 30 percent. At a qualitative level, we find important differences in the response by sex, marital status, and SES, among others. We conduct a detailed quantitative analysis of response to timing of Social security claiming and find that on average individuals would postpone claiming Social Security by 1.13 years. If this time was spent working by everyone then the annual Social Security benefit would drop on average by 20 percent rather than the initial 30 percent imposed by the reform. In other words the response to claim later and work longer would make up for one third of the initial cut in Social Security benefits.

Labor Supply Elasticity and Social Security Reform

by Selahattin Ímrohoroglu and Sagiri Kitao
SSA Project # BC08-S2 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2009-5

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Previous literature on social security reform has used a variety of period utility functions and calibrated values for the intertemporal elasticity of substitution (IES) in labor. In this paper, we extensively study various preferences and values for IES in a general equilibrium model with overlapping generations. We calibrate the model to key U.S. macroeconomic indicators and document how social security reform impacts the economy under different preferences. We find that aggregate effects are surprisingly similar, regardless of the wide range of the values of IES used. However, reform leads to a life-cycle reallocation of work hours from early years to later working years and the size of this reallocation significantly increases with the IES.

Labor Supply Responses to Marginal Social Security Benefits: Evidence from Discontinuities

by Jeffrey B. Liebman, Erzo F.P. Luttmer, and David G. Seif
SSA Project # NB06-12 • Social Security and Retirement
National Bureau of Economic Research Working Paper 14540

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A key question for Social Security reform is whether workers currently perceive the link on the margin between the Social Security taxes they pay and the Social Security benefits they will receive. We estimate the effects of the marginal Social Security benefits that accrue with additional earnings on three measures of labor supply: retirement, hours, and labor earnings. We develop a new approach to identifying these incentive effects by exploiting five provisions in the Social Security benefit rules that generate discontinuities in marginal benefits or non-linearities in marginal benefits that converge to discontinuities as uncertainty about the future is resolved. We find clear evidence that individuals approaching retirement (age 52 and older) respond to the Social Security tax-benefit link on the extensive margin of their labor supply decisions: we estimate that a 10 percent increase in the net-of-tax share reduces the two-year retirement hazard by a statistically significant 2.1 percentage points from a base rate of 15 percent. The evidence with regards to labor supply responses on the intensive margin is more mixed: we estimate that the elasticity of hours with respect to the net-of-tax share is 0.41 and statistically significant, but we do not find statistically significant earnings elasticity.

The Market Value of Social Security

by John Geanakoplos and Stephen P. Zeldes
SSA Project # NB08-11 • Social Security and Retirement
National Bureau of Economic Research

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The Social Security Administration calculates a number of measures to assess the financial state of the system. This requires assigning a current value to the stream of benefit payments and payroll tax revenues that can be expected in the future. The traditional actuarial approach to making these calculations ignores risk, and assigns an expected value. Private financial markets would value these future costs and revenues differently by adjusting for uncertainty and risk. In exploratory work completed last year, our focus was on the market value of already obligated future benefits. The idea was to value future Social Security benefit obligations in a way that accounts for future risks and uncertainties in a way that investors would do if they regarded these payments as liabilities of their own businesses. In this study, we expand the analysis by estimating the market value for the Social Security system as a whole. We first estimate the market value of Social Security's future expenditures (worker benefits) and receipts (worker contributions obtained from payroll taxes). In addition to already-obligated benefits (the focus of our preliminary work), we consider the full stream of benefits and payroll tax contributions that can be expected in the future. We then construct market-based (i.e., risk-adjusted) estimates of three common measures of Social Security's financial health, and compare these estimates to those obtained using the traditional SSA methods with no correction for the price of risk. Using this market-based approach, and applying risk adjustment empirically, we estimate that the 75-year open group unfunded liability is 30 percent lower than the SSA estimates using actuarial methods.

Marking Social Security's Open Group Liability to Market

by Paul Anton Koehler and Laurence J. Kotlikoff
SSA Project # UM09-03 • Social Security and Retirement
Michigan Retirement Research Center Working Paper 2009-217

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This paper marks Social Security's open group liability to market taking into account the riskiness of its aggregate benefit payments and tax receipts. The open group liability references the present value of the system's net cash flow from now through the indefinite future. The latest Social Security Trustees Report (2009) estimates this liability at $15.1 trillion. But the discounting used to form this estimate takes no explicit account of risk and, therefore, potentially misprices both future benefits and taxes. Our risk adjustment is based on Ross (1976) Arbitrage Pricing Theory. Specifically, we treat the growth rates of the system's aggregate benefits and taxes as implicit securities that are spanned by the returns on marketed securities. This procedure focuses, then, on aggregate flows. This is quite different from the micro-based aggregation procedures underlying the Trustees Report, which requires highly detailed analysis of the cash flows arising from the program's numerous benefit and tax provisions. Our pricing of Social Security's infinite horizon net liability builds on prior independent work by Blocker, Kotlikoff, and Ross (2009) and Geanakoplos and Zeldes (2009). Both papers attempt to risk-adjust Social Security liability measures, albeit two different liability measures, which are, in turn, different from the liability measure considered here. Blocker, et al. (2009) considers the liability to current workers of paying their future benefits net of receiving their future taxes assuming the system continues to operate under its current rules. Geanakoplos, et al. (2009) consider the "shutdown liability" (also known as the "maximum transition cost") of the current system; i.e., they value the system's accrued benefit liability. Our results, which we view as preliminary, suggest that the market value of Social Security's open group liability may be many times larger than the $15.1 trillion stated in the Trustees' Report. Unlike Blocker, Kotlikoff, and Ross (2009), this discrepancy between our financial valuation and Social Security's does not reflect differences in the value assumed for the safe rate of return. To control for this factor, we simply follow Social Security (and Geanakoplos, et. al., 2009) in assuming a 2.9 percent safe real rate of discount. We also find that the precise marketed assets used to price future Social Security benefits and taxes can significantly alter the estimate of the open group liability.

The Optimal Design of Social Security Benefits

by Shinichi Nishiyama and Kent Smetters
SSA Project # UM08-19 • Social Security and Retirement
Michigan Retirement Research Center Working Paper 2008-197

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The United States Social Security system is fairly unique in that it explicitly allows for a progressive formulation of retirement benefits by assigning a larger replacement rate to workers with small pre-retirement wages. In contrast, the public pension systems in other countries often replace a constant fraction of pre-retirement wages, although the length of the "averaging period" is typically shorter relative to the U.S. This paper examines the ex-ante optimal U.S. Social Security benefit structure using the model developed in Nishiyama and Smetters (2007). On one hand, progressivity in the benefit structure provides risk sharing against shocks that are difficult to insure privately. On the other hand, progressivity introduces various marginal tax rates that distort labor supply. Rather surprisingly, we find that the ex-ante best U.S. Social Security replacement rate structure is fairly "flat." Intuitively, the relatively long averaging period used in the U.S. system formulation already provides some insurance against negative idiosyncratic shocks, but in a manner that is more efficient than explicit redistribution.

The Perception of Social Security Incentives for Labor Supply and Retirement: The Median Voter Knows More than You'd Think

by Jeffrey B. Liebman and Erzo F.P. Luttmer
SSA Project # NB08-01 • Social Security and Retirement
National Bureau of Economic Research

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The degree to which the Social Security tax distorts labor supply decisions depends on the extent to which individuals recognize that future benefits are based on how much they worked. To measure the perceived linkage between labor supply and Social Security benefits, we administer a survey about the Social Security benefit rules to a representative sample of Americans aged 50–70. We find that the majority of respondents believe that their Social Security benefits increase with labor supply, i.e., that the Social Security benefit rules provide a positive work incentive. The magnitude of this perceived incentive varies across respondents, but people generally cite an incentive that is somewhat greater than the actual figure. We also surveyed people about their understanding of various provisions in the Social Security benefit rules. We find that some of these provisions (e.g., effects of delayed benefit claiming, and rules on widow benefits) are relatively well understood while others (rules on spousal benefits, provisions on which years of earnings are taken into account) are less well understood.

Preparation for Retirement, Financial Literacy and Cognitive Resources

by Adeline Delavande, Susann Rohwedder, and Robert Willis
SSA Project # UM08-07 • Social Security and Retirement
Michigan Retirement Research Center Working Paper 2008-190

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Traditional economic models assume that individuals have full information and act perfectly rationally. However, we show that there is considerable variation in financial literacy in the population and propose modeling the acquisition of financial knowledge in a human capital production framework. The model makes several predictions, notably with respect to portfolio choice. For example, it helps explain household nonparticipation in the stock market for some fraction of the population, and it provides guidance about the share of risky assets to hold for other types of households. Estimation of the human capital production function for financial knowledge on data from the Cognitive Economics Survey yields results that are consistent with important features of the model.

Reconciling Findings on the Employment Effect of Disability Insurance

by John Bound, Stephan Lindner, and Timothy Waidmann
SSA Project # UM09-01 • Social Security and Retirement
Michigan Retirement Research Center Working Paper 2010-239

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Over the last 25 years the Social Security Disability Insurance Program (DI) has grown dramatically. During the same period of time employment rates for men with work limitations showed substantial declines in both absolute and relative terms. While the timing of these trends suggests that the expansion of DI was a major contributor to employment decline and raises questions about the targeting of disability benefits, studies using denied applicants suggest a more modest role for DI expansion. In order to reconcile these findings, we decompose total employment changes into population and employment changes for three categories: DI beneficiaries, denied applicants and non-applicants. Our results show that during the early 1990s, the growth in DI can fully explain the employment decline for men only under an extreme assumption about the employment potential of beneficiaries. For the period after the mid-1990s, we find little role for the DI program in explaining the continuing employment decline for men with work limitations.

Retirement and Social Security: A Time Series Approach

by Brendan Cushing-Daniels and C. Eugene Steuerle
SSA Project # BC08-01 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2009-1

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Traditional analyses of retirement decisions focus on the age, from birth, of the individual making choices about how much to work, consume, and save for old age. However, remaining life expectancy is arguably a better way of examining these issues. As mortality rates decline, people at a given age now have more remaining years of life expectancy than they did in the past. If participation rates at older ages remain constant (or decline), then average time spent in retirement will increase. Additionally, because health status and mortality are correlated, adults with more expected years of life are generally in better health (and better able to work) than those with fewer years of remaining life. This paper examines labor force participation rates of older workers considering both chronological age and remaining life expectancy. Results show that participation by remaining life expectancy declines for men through the early 1990s, leveling off in the next decade. However, participation by age have been rising for men in their sixties since the mid-1990s. Whether we specify the empirical model by age or by remaining life expectancy, ages 62 and 65 both have strong negative effects on participation, confirming a major role in retirement decisions for Social Security. Finally, we find that controlling for other factors—education, marital status, and business cycle effects—magnifies the decline in participation attributable to cohort effects for men born between 1900 and 1960, but reduces the importance of cohort effects for women born in these years.

The Role of Information for Retirement Behavior: Evidence Based on the Stepwise Introduction of the Social Security Statement

by Giovanni Mastrobuoni
SSA Project # BC08-S6 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2009-23

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In 1995, the Social Security Administration started sending out the annual Social Security Statement. It contains information about the worker's estimated benefits at the ages 62, 65, and 70. I use this unique natural experiment to analyze the retirement and claiming decision-making. First, I find that, despite the previous availability of information, the Statement has a significant impact on workers' knowledge about their benefits. These findings are consistent with a model where workers need to gather costly information in order to improve their retirement decision. Second, I use this exogenous variation in knowledge to analyze the optimality of workers' decisions. Several findings suggest that workers do not change their retirement behavior: i) Workers do not change their expected age of retirement after receiving the Statement; ii) monthly claiming patterns do not show any change after the introduction of the Social Security Statement; iii) workers do not become more sensitive to Social Security incentives after receiving the Statement. Either, workers are already behaving optimally, or the information contained in the Statement is not sufficient to improve their retirement behavior.

Should the Poor Own Stocks? The Role of Social Security

by Ying Chen and Kent Smetters
SSA Project # NB07-08 • Social Security and Retirement
National Bureau of Economic Research

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This paper examines how households should optimally allocate their portfolio choices between stocks and bonds in a lifecycle model where they face uninsurable wage shocks and an uncertain lifetime. We include a progressive social security system that is wage indexed before retirement, as in many pay-as-you-go systems including the United States. Social security benefits are correlated with stock returns at a low frequency that is relevant for lifecycle retirement planning. We show that this model is able to more closely replicate the key stylized facts of portfolio choice relative to alternative specifications.

Social Security and the Joint Trends in Labor Supply and Benefits Receipt Among Older Men

by Bo MacInnis
SSA Project # BC08-S5 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2009-22

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Using data from the Current Population Surveys, we find an increase in the fraction of older American men who worked without receiving Social Security retirement benefits and a decline in the fraction of men who claimed benefits without working during the period 1980–2006. Using bivariate probit regressions, we find that an increase in Social Security's normal retirement age decreased labor force participation rate regardless of benefits receipt status; that an increase in the delayed retirement credit increased benefit receipt regardless of labor force status; and that labor force participation and claiming Social Security benefits are strongly and negatively correlated.

Social Security Claiming: Trends and Business Cycle Effects

by Owen Haaga and Richard W. Johnson
SSA Project # BC11-04 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2012-5

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This study examines Social Security claiming behavior, which has important implications for older Americans and the system itself. Retirees may begin collecting benefits as early as age 62, but early claimants receive lower monthly benefits for the rest of their lives. Our data come from Survey of Income and Program Participation files from 1984 to 2009 linked to administrative records on earnings and benefits. The sample is restricted to respondents with 40 quarters of covered employment who did not claim benefits before age 62. Results indicate that early claiming declined over the past decade, after increasing over the previous 10 years. For men, the share claiming at age 62 fell from 55.3 percent in the 1930–34 birth cohort to 46.4 percent in the 1940–44 cohort. Over the same period, the share of women claiming at 62 fell from 59.3 to 49.0 percent. The recent trend toward delayed claiming is evident among all educational groups, not just college graduates. Hazard models show that high unemployment boosts Social Security claiming among men with limited education. A 1 percentage point increase in the state unemployment rate is associated with a 0.4 percentage point increase in the likelihood each month that men who never attended college claim benefits, a relative increase of 6 percent. This estimate implies that the Great Recession increased claiming for men with limited education by about 40 percent. Claiming behavior among women and well-educated men is not significantly correlated with the state unemployment rate, however.

Social Security Literacy and Retirement Well-Being

by Hugo A. Benítez-Silva, Berna Demiralp, and Zhen Liu
SSA Project # UM09-11 • Social Security and Retirement
Michigan Retirement Research Center Working Paper 2009-210

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We build upon the growing literature on financial literacy, which studies the prevalence of lack of knowledge about various financial issues, and analyze how much people know about the Social Security rules using a small pilot survey conducted in 2007, and a follow-up and extended survey funded by MRRC conducted in December of 2008. We then assess the consequences of the apparent prevalence of lack of information by individuals about the rules governing the Social Security system using a realistic and empirically-based life-cycle model of retirement behavior under uncertainty. We investigate the individual's retirement and savings decisions under incomplete information and unawareness, in which a portion of the population does not know some or all of the rules of the system. We compare the outcomes in these cases to the outcome under full information, computing the welfare gain resulting from the acquisition of information regarding the Social Security system. Our analysis can illuminate the need for policies that foster knowledge of the system, which can improve welfare, and can result in better policy outcomes.

Social Security, Benefit Claiming and Labor Force Participation: A Quantitative General Equilibrium Approach

by Selahattin Ímrohoroglu and Sagiri Kitao
SSA Project # BC08-S2 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2010-02

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We build a general equilibrium model of overlapping generations of individuals with endogenous saving, labor force participation, work hours and social security benefit claiming. We use the model to study the impact of three Social Security reforms; reduction in benefits and payroll taxes, increase in the earliest retirement age (ERA) from 62 to 64 and increase in the normal retirement age (NRA) from 66 to 68. We show that a 50 percent cut in the scope of the current unfunded system significantly raises asset holdings and the labor input, primarily through higher participation of older workers, and reduces the shortfall of the social security budget with a reduction in early-claiming. Increasing NRA also raises saving and labor supply but the effects are smaller. Postponing ERA has only negligible impact. When the projected aging of the population is taken into account, the case for a reform that encourages labor force participation of the elderly becomes much stronger.

Trends in Earnings Instability of Couples: How Important is Marital Sorting?

by Chinhui Juhn and Kristin McCue
SSA Project # NB09-21 • Social Security and Retirement
National Bureau of Economic Research

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Using the matched March Current Population Surveys for 1968–2008 and 1978–2006 Social Security earnings data matched to several Survey of Income and Program Participation panels, this paper examines the volatility of individual and couples' year-to-year earnings, and whether earnings volatility is changing over time. We find couples' earnings instability remained fairly stable over time due to offsetting trends in men's and women's earnings instability. While men's earnings instability increased, particularly during the 1970s, women's earnings instability declined dramatically. We find some evidence that the correlation of spouses' earnings changes became more positively related over time, but we generally find these correlations to be small. Comparing actual couples to simulated couples who are randomly matched, we find similar trends in earnings instability, suggesting that marital coordination of work and marital sorting (choosing a spouse with similar characteristics to yourself) are relatively unimportant for instability measures.

Unusual Social Security Claiming Strategies: Costs and Distributional Effects

by Alicia H. Munnell, Steven A. Sass, Alex Golub-Sass, and Nadia Karamcheva
SSA Project # BC09-02 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2009-17

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When to claim Social Security is one of the most important decisions Americans face when approaching retirement. Recently, several unconventional claiming strategies have come to light—"Free Loan," "Claim and Suspend," and "Claim Now, Claim More Later"—that have the potential to pay higher lifetime benefits to some individuals, increasing system costs. In the "Free Loan" strategy, an individual can claim benefits at a given age and later repay them and file again, obtaining an increased benefit from the delayed filing. This strategy is equivalent to a "no interest" loan from Social Security and could potentially cost the program as much as $11 billion a year. "Claim and Suspend" allows an individual to claim benefits and then immediately suspend them, either to put his own benefits on hold if he reenters the workforce or to allow his spouse to claim a spousal benefit while he continues to work and earn delayed retirement credits. The potential cost of allowing couples the option of "Claim and Suspend" is about $0.5 billion dollars a year. In the "Claim Now, Claim More Later" strategy, a married individual claims a spousal benefit while delaying claiming his own retired worker benefit in order to build up delayed retirement credits. This option could potentially cost Social Security $10 billion a year. Of the three strategies, "Claim and Suspend" appears to have the clearest policy rationale as it provides an incentive for individuals to work longer.

What Effect Do Time Constraints Have on the Age of Retirement?

by Leora Friedberg, Wei Sun, and Anthony Webb
SSA Project # BC08-08 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2008-17

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Work affects both the time available for non-market activities and the times at which those activities are performed—and therefore work-induced constraints on time use may influence retirement decisions. We analyze these effects by combining new data from the American Time Use Survey with information on retirement in the Health and Retirement Study. We find that the propensity to engage in three types of non-work activities—household production, leisure, and tertiary activities (eating, sleeping, grooming)—are substantially altered by work. Moreover, the ways in which the timing of these activities are distorted differ across ten different job types (industry-occupation combinations) that we examine in the ATUS. We use the resulting measures of time distortions as control variables in multinomial logit retirement models that we estimate in the HRS. Older workers in jobs with greater distortions to the quantity and timing of leisure activities have an increased propensity to leave those jobs, either for new jobs or for retirement. On the other hand, workers in jobs with greater distortions to household production have a reduced propensity to leave their jobs, and distortions to tertiary activities raise the propensity to take new jobs but reduce the propensity to retire.

When They're Sixty-Four: Peer Effects and the Timing of Retirement

by Kristine Brown and Ron Laschever
SSA Project # NB09-17 • Social Security and Retirement
National Bureau of Economic Research

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This paper examines the effect of peers on an individual's likelihood of retirement using data from the Los Angeles United School District. We show that two large pension reforms differentially impacted the financial incentives for retirement within and across schools. This created a natural experiment that allows us to identify the effect of peers on retirement behavior. Using an administrative dataset of the full population of district teachers ages 55 and over, covering the years 1997–2003 (n=46,542), we construct school-level peer groups and calculate the impact of the reforms on pension financial incentives. We use a measure of the unexpected (reform-induced) change in the pension wealth of teachers in a school to instrument for retirements at that school. After controlling for individual and school characteristics, and including individual fixed effects, our IV estimates of the effect of colleagues' retirement on a teacher's own likelihood of retirement are sizable and statistically significant. For example, we find that the retirement of an additional teacher in the previous year at the same school increases a teacher's own likelihood of retirement by an additional 1.5 percentage points.

Who Determines When You Retire? Peer Effects and Retirement

by John M.R. Chalmers, Woodrow T. Johnson, and Jonathan Reuter
SSA Project # NB08-13 • Social Security and Retirement
National Bureau of Economic Research

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We study the factors that affect the choice of retirement date for a large sample of retirement-eligible Oregon state employees between 1992 and 2003. Given the complexities of the Oregon Public Employees Retirement System, we hypothesize that individuals will infer their optimal retirement behavior, in part, from the retirement behavior of their coworkers. Indeed, controlling for individual retirement incentives and characteristics, we find that individuals are economically significantly more likely to retire in months when more of their coworkers retire. The facts that this positive correlation is robust to the inclusion of numerous fixed effects and controls and survives estimation using two distinct sets of instrumental variables lead us to conclude that it reflects peer effects in the choice of retirement date. With respect to the possible welfare consequences of peer effects, our preliminary evidence is mixed, but points to modest costs and benefits. Interestingly, we find little evidence of peer effects amongst employees whose salaries are in the bottom 25th percentile, where financial literacy is likely to be the lowest.

Would People Behave Differently If They Better Understood Social Security? Evidence From a Field Experiment

by Jeffrey B. Liebman and Erzo F. P. Luttmer
SSA Project # NB09-01 • Social Security and Retirement
National Bureau of Economic Research

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This paper presents the results of a field experiment in which a random subsample of older workers was given information about key Social Security provisions, while a control group was not. The experiment was designed to examine whether it is possible to affect individual behavior using a relatively inexpensive informational intervention about the provisions of a public program and to explore what mechanisms underlie the behavior change. We find that our relatively mild intervention (sending an informational brochure and an invitation to a webtutorial) significantly increased labor force participation one year later and that this effect is driven by female subjects. The information intervention increased the perceived returns to working longer, especially among female respondents, which suggests that the behavioral response can be attributed at least in part to updated information about Social Security.

Macroeconomic Analyses of Social Security

Aging and Pension Reform in a Two-Region World: The Role of Human Capital

by Edgar Vogel, Alexander Ludwig, and Axel Borsch-Supan
SSA Project # NB11-13 • Macroeconomic Analyses of Social Security
National Bureau of Economic Research

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Projected demographic changes in industrialized countries will reduce the share of the workingage population. Analyses based on standard OLG models predict that these changes will increase the capital–labor ratio. Hence, rates of return to capital decrease and wages increase, which has adverse welfare consequences for current middle aged asset rich agents. This paper addresses two important endogenous adjustments channels to dampen these detrimental effects of demographic change: investing abroad and endogenous human capital formation. Our quantitative finding is that openness has a relatively mild effect. In contrast, endogenous human capital formation in combination with profound changes in pension policy—fixing contribution rates and increases in the retirement age—have strong effects. Maximum welfare losses of demographic change for households alive in 2010 decrease from 6.5% to 3.6% when human capital endogenously adjusts and when the statutory retirement age is indexed to life expectancy.

Aging, Asset Markets, and Asset Returns

by Axel Borsch-Supan, and Alexander Ludwig
SSA Project # NB08-14 • Macroeconomic Analyses of Social Security
National Bureau of Economic Research

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This study looks at the complex interactions between demographic trends, public pension reform, labor markets, and capital markets in a global context. The investigation connects several strands of literature. First, it investigates how strong "asset meltdown" effects are in an aging economy that is embedded in global financial markets. Second, it focuses on the importance of labor supply in particular, how policies affect labor markets, and how labor markets in return affect financial market performance. Third, it considers the impact of public pension reform on both capital and labor markets. And fourth, it looks ahead at the overall macroeconomic outcomes that result from these changes. The effects of population aging on the value of capital are estimated to be modest, and moderated by international capital flows. No major asset meltdown is predicted by the model. The changes in labor markets, however, may significant impact macroeconomic outcomes. The main effect of demographic change is that the number of gainfully employed people could fall sharply over time, relative to the population of consumers. This will put pressure on productive capacity of the economy, and could contain future economic growth. The study concludes by reiterating the importance of capital markets in an aging society, as the only way of distributing resources geographically, over time, and across generations.

Aging, Asset Markets, and Asset Returns: A View from Europe to Asia

by Axel Borsch-Supan and Alexander Ludwig
SSA Project # NB09-10 • Macroeconomic Analyses of Social Security
National Bureau of Economic Research

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This study reports findings from the continuing enhancement and application of a multinational macroeconomic model that looks at effects of population aging, in conjunction with social security reform, on macroeconomic outcomes. A key emphasis of the current work is on the interactions between labor and capital markets. Another key addition to the model is the inclusion of emerging countries, and how the growth of emerging countries affects the models predicted macroeconomic implications. The direct effect of demographic change is that the number of employed persons will fall sharply from 2010 onwards, whereas the number of consumers will remain largely unchanged. Labor, at least in the highly skilled sector, will become increasingly scarce, so that demand for capital increases. This is where the inclusion in the model of emerging economies becomes so important, as financing from the older, labor constrained countries is provided for production facilities abroad in "younger" countries, such as India. The implications of population aging on asset market returns are moderated in a world with such international mobility of capital. A number of labor-related factors are also part of the macroeconomic dynamic. For example, education and training will assume an increasingly important role in order to keep the returns of productive physical capital high. Aging will also precipitate labor market and pension reform which will, in turn, change labor supply and saving behavior.

Asset Cycles and the Retirement Decisions of Older Workers

by Jan Ondrich
SSA Project # BC09-03 • Macroeconomic Analyses of Social Security
Center for Retirement Research at Boston College Working Paper 2010-13

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To determine how asset values of older workers affect their future retirement decisions, it is important to take into account how asset values change over asset cycles. This study uses HRS data from waves 1992 through 2008 together with restricted SSA data on geographic location to estimate a model of the age at first self-reported retirement for the subsample of married males. The model covariates include demographic variables, workplace variables, non-housing financial wealth, housing equity and size of mortgage. The proportional hazard estimates are, for the most part, significant and of the correct sign. The estimated models replicate the decisions of the sample members for the period from 2000 to 2007. The models do not replicate the sharp drop in the aggregate retirement rate in the year 2008, the final year of the sample, which is also the first sample year in which non-housing financial wealth and housing equity both declined throughout the United States.

Buffering Shocks to Well-Being Late in Life

by Matthew D. Shapiro
SSA Project # UM09-05 • Macroeconomic Analyses of Social Security
Michigan Retirement Research Center Working Paper 2009-211

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Consumption provides a comprehensive measurement of economic well-being. This research shows that consumption is well-insured with respect to health status and widowing. Using data from the Health and Retirement Study (HRS) and its CAMS supplement, it shows that consumption responds little to changes in health status even though adverse health generates substantial out-of-pocket expenses. Similarly, the effect of widowing on consumption, though substantial, is not strongly driven by changes in economic resources. Men experience little loss of monetary resources when being widowed. Women have the same overall loss in consumption as men when being widowed despite greater declines in economic resources. Hence, despite the adverse consequences for income and wealth female widows, women experience no greater drop in consumption from losing a spouse than do men.

Effects of Employer Health Costs on the Trend and Distribution of Social Security Taxable Wages

by Gary Burtless and Sveta Milusheva
SSA Project # BC11-07 • Macroeconomic Analyses of Social Security
Center for Retirement Research at Boston College Working Paper 2012-11

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The increasing cost of employer contributions for employee health insurance reduces the percentage of compensation that is subject to the payroll tax. Rising insurance contributions can also have a more subtle effect on the Social Security tax base because they influence the distribution of money wages. Workers bear most of the burden of employer health contributions through lower money wages. Any change in the average cost and distribution of costs of employer health plans can have an effect on the distribution of wages and the percentage of wages subject to the payroll tax. This paper uses the Medical Expenditure Panel Survey (MEPS) to analyze trends in the cost of employer health contributions and the cross-worker distribution of health contributions. Our analysis shows that the 1996–2008 increase in employer health premiums was faster than overall compensation increases but only slightly faster among workers below the taxable maximum compared with those above the maximum. However, because employer health insurance premiums represent a much higher percentage of compensation below the maximum taxed earnings amount, the effect of health cost trends exerted a disproportionate downward pressure on money wages below the taxable maximum, reducing the percentage of compensation subject to the payroll tax. We simulated the implications of the health reform law on the trend in employer health costs around 2016. We find only slight effects on the fraction of worker compensation that will be subject to Social Security taxes. The higher insurance costs faced by employers who will be required to offer health plans will be approximately offset by lower health costs on the part of employers who will see some insured employees accept subsidized health insurance outside of an employer plan. The main long-term impact of reform on the taxable wage base is likely to be through its effect on the trend in underlying health care costs.

Health Care Spending Growth and the Future of U.S. Tax Rates

by Katherine Baicker and Jonathan Skinner
SSA Project # NB11-14 • Macroeconomic Analyses of Social Security
National Bureau of Economic Research

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The fraction of GDP devoted to health care in the United States is the highest in the world and rising rapidly. Recent economic studies have highlighted the growing value of health improvements, but less attention has been paid to the efficiency costs of tax-financed spending to pay for such improvements. This paper uses a life cycle model of labor supply, saving, and longevity improvement to measure the balanced-budget impact of continued growth in the Medicare and Medicaid programs. The model predicts that top marginal tax rates could rise to 70 percent by 2060, depending on the progressivity of future tax changes. The deadweight loss of the tax system is greater when the financing is more progressive. If the share of taxes paid by high-income taxpayers remains the same, the efficiency cost of raising the revenue needed to finance the additional health spending is $1.48 per dollar of revenue collected, and GDP declines (relative to trend) by 11 percent. A proportional payroll tax has a lower efficiency cost (41 cents per dollar of revenue averaged over all tax hikes, a 5 percent drop in GDP) but more than doubles the share of the tax burden borne by lower income taxpayers. Empirical support for the model comes from analysis of OECD country data showing that countries facing higher tax burdens in 1979 experienced slower health care spending growth in subsequent decades. The rising burden imposed by the public financing of health care expenditures may therefore serve as a brake on health care spending growth.

Macroeconomic Conditions and Updating of Expectations by Older Americans

by Purvi Sevak and Lucie Schmidt
SSA Project # UM11-13 • Macroeconomic Analyses of Social Security
Michigan Retirement Research Center Working Paper 2011-259

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We investigate expectation formation, using the 1994–2008 Health and Retirement Study (HRS), merged to a number of variables on local and national macroeconomic conditions. We find that individuals update their expectations about the future economy in response to these macroeconomic conditions. Respondents revised their expected probability of a major depression upward substantially during 2008, the onset of the current economic downturn and on average during the entire survey period when their state's unemployment rate was higher and when average monthly stock prices fell. Increasing stock prices are also associated with a decreased expectation of future stock price increases, which is consistent with beliefs of mean reversion in stock prices. Furthermore, expectations of double digit inflation increase when job gains increase, perhaps reflecting beliefs of a tradeoff between unemployment and inflation. In many cases, we find that college graduates' expectations are more responsive than those of less educated individuals. We also find that macroeconomic conditions are correlated with subjective probabilities of one's future labor supply. House price increases are associated with a decreased expected probability of working past age 62 and higher unemployment is associated with an increased expected probability of working past age 65. The unemployment rate effect is larger for less-educated individuals, while the house price effect is larger for more-educated individuals. This may be because college graduates are less likely to be affected by business cycle fluctuations, and more likely to be homeowners. Together, these results provide strong evidence that expectations are shaped by fluctuations in the macroeconomy.

Recessions, Social Security, and Living Arrangements of the Elderly

by Courtney C. Coile and Phillip B. Levine
SSA Project # NB11-12 • Macroeconomic Analyses of Social Security
National Bureau of Economic Research

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We explore the effect of unemployment around the time of retirement on elderly living arrangements. Specifically, we estimate reduced-form models that relate the age-62 unemployment rate to the living arrangements of men ages 70 and above using data from the 2000 U.S. Census and the 2001 through 2009 American Community Surveys (ACS). We find that experiencing a higher unemployment rate at age 62 is associated with a reduced probability of living independently in retirement. The effect is strongest for those who are older, married, and high school graduates. We show that the effect of labor market conditions on elderly living arrangements peaks at around age 62, the age of eligibility for Social Security benefits. These findings, in combination with those from our earlier work, strongly suggest that weak labor markets around the time of retirement have long-lasting, negative effects on retiree well-being and that the mechanism for this effect is earlier retirement and claiming of Social Security benefits.

Retirement in a Life Cycle Model of Labor Supply with Home Production

by Richard Rogerson and Johanna Wallenius
SSA Project # UM09-06 • Macroeconomic Analyses of Social Security
Michigan Retirement Research Center Working Paper 2009-205

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We analyze the forces that can generate retirement in different versions of standard life cycle models of labor supply. While non-convexities in production can generate retirement, we show that the size of non-convexities needed increases sharply as the intertemporal elasticity of substitution for labor decreases. In a model with home production, we show that these models imply a large increase in time devoted to home production at retirement. This is contrary to what is found in the ATUS data. We suggest that non-convexities in the enjoyment of leisure time may be a promising alternative feature to generate retirement.

Rising Tides and Retirement: The Aggregate and Distributional Effects of Differential Wage Growth on Social Security

by Melissa M. Favreault
SSA Project # BC08-03 • Macroeconomic Analyses of Social Security
Center for Retirement Research at Boston College Working Paper 2009-7

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Recent growth in wage inequality has important implications for Social Security solvency and the distribution of benefits. Because only earnings below the taxable maximum are subject to Social Security payroll taxes, wage growth that is concentrated among very high earners will generate lower tax receipts than wage growth that is more evenly distributed. The progressivity of the Social Security benefit formula increases benefit payouts when the share of workers with low wages grows. This study uses a dynamic microsimulation model to examine the aggregate and distributional consequences of alternative scenarios about the distribution of future wage growth among workers. We find fairly marked changes in projected Social Security benefit distributions, poverty, and long-term financing status with relatively modest changes in assumptions about wage differentials.

Risky Pensions and Household Saving Over the Life Cycle

by David A. Love and Paul A. Smith
SSA Project # BC07-S2 • Macroeconomic Analyses of Social Security
Center for Retirement Research at Boston College Working Paper 2008-19

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Recent defined benefit (DB) pension freezes in large healthy firms such as Verizon and IBM, as well as terminations of plans in the struggling steel and airline industries, highlight the fact that these traditional pensions cannot be viewed as risk-free promises from the employee's perspective. In this paper we develop an empirical dynamic programming framework to investigate household saving decisions in a model economy with risky DB pensions. The model incorporates important sources of uncertainty facing households, including asset returns, employment, income, and mortality, as well as pension freezes. Applying a compensating variation measure of welfare, we find that pension freezes reduce welfare by a maximum of about $6,000 for individuals with a high school degree and about $2,000 for individuals with a college degree.

The Trajectory of Wealth in Retirement

by David A. Love, Michael G. Palumbo, and Paul A. Smith
SSA Project # BC07-S2 • Macroeconomic Analyses of Social Security
Center for Retirement Research at Boston College Working Paper 2008-7

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As the baby boomers begin to retire, a great deal remains unknown about the evolution of wealth toward the end of life. In this paper, we develop a new measure of household resources that converts total financial, nonfinancial, and annuitized assets into an expected annual amount of wealth per person. We use this measure, which we call "annualized comprehensive wealth" to investigate spend-down behavior among older households in the Health and Retirement Study. Our analysis indicates that, in (real) dollar terms, the median household's wealth declines more slowly than its remaining life expectancy, so that real annualized wealth actually tends to rise with age over retirement. Comparing the estimated age profiles for annualized wealth with profiles simulated from several different life cycle models, we find that a model that takes into account uncertain longevity, uncertain medical expenses, and (for higher-income retirees) intended bequests lines up best with the HRS data.

What Replace Rates Should Households Use?

by John Karl Scholz and Ananth Seshadri
SSA Project # UM09-04 • Macroeconomic Analyses of Social Security
Michigan Retirement Research Center Working Paper 2009-214

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Common financial planning advice calls for households to ensure that retirement income exceeds 70 percent of average pre-retirement income. We use an augmented life-cycle model of household behavior to examine optimal replacement rates for a representative set of retired American households. We relate optimal replacement rates to observable household characteristics and in doing so, make progress in developing a set oftheory-based, but readily understandable financial guidelines. Our work should be a useful building block for efforts to assess the adequacy of retirement wealth preparation and efforts to promote financial literacy and well-being.

Wealth and Retirement Income

Accounting for the Heterogeneity in Retirement Wealth

by Fang Yang
SSA Project # BC07-S5 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2009-6

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This paper studies a quantitative dynamic general equilibrium life-cycle model where parents and their children are linked by bequests, both voluntary and accidental, and by the transmission of earnings ability. This model is able to match very well the empirical observation that households with similar lifetime earnings hold very different amounts of wealth at retirement. Earnings heterogeneity and borrowing constraints are essential in generating the variation in wealth at retirement among low lifetime earnings households, while inheritance heterogeneity helps to generate the heterogeneity in wealth at retirement among high lifetime earnings households.

Actual and Anticipated Inheritance Receipts

by Norma B. Coe and Anthony Webb
SSA Project # BC09-08 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2009-32

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Using data from the Health and Retirement Study, we compare actual inheritances received during the period 1994 to 2004 with the amounts that, in 1994, households anticipated receiving within ten years. We find little evidence of systematic forecasting errors. The factors affecting inheritance receipt also affect expectation formation. Although the distribution of inheritances is highly skewed, they are generally modest in amount and uncorrelated with lifetime income, and therefore have almost no effect on various measures of inequality. We find no evidence that households anticipating receipt of an inheritance save less than otherwise similar households, although this could reflect unobserved heterogeneity in tastes for saving.

The Adequacy of Economic Resources in Retirement

by Michael Hurd and Susann Rohwedder
SSA Project # UM08-11 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2008-184

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The most common metric for assessing the adequacy of economic preparation for retirement is the income replacement rate, the ratio of income after retirement to income before retirement. However both economic theory and common sense say that someone is adequately prepared if she is able to maintain her level of economic well-being, which is not the same as maintaining her level of income or some fixed proportion of income. Economic well-being is typically measured by consumption, which is the measure we use. We define and estimate measures of economic preparation for retirement based on a complete inventory of economic resources, particularly wealth, which we compare with optimal consumption paths. We find that a substantial majority of those just past the usual retirement age are adequately prepared for retirement in that they will be able to finance a path of consumption that begins at their current level of consumption and then follows an age-pattern similar to that of current retirees. This is not true, however, for all groups in the population. In particular, almost half of singles who lack a high school education are likely to be forced to reduce consumption. Couples are much better prepared than singles. But because of taxes a substantial number of married college graduates will have to reduce consumption.

An Update on 401(k) Plans: Insights from the 2007 Survey of Consumer Finance

by Alicia H. Munnell, Richard W. Kopcke, Francesca Golub-Sass, and Dan Muldoon
SSA Project # BC09-04 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2009-26

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The maturation of the 401(k) system and the enactment of the Pension Protection Act of 2006, which made 401(k) plans easier and more automatic, were expected to enhance the role that 401(k)s played in the provision of retirement income. So, originally, the release of the Federal Reserve's 2007 Survey of Consumer Finances (SCF) seemed like a great opportunity to re-assess 401(k)s. But the 2007 SCF reflects a world that no longer exists. Interviews were conducted between May and December when the Dow Jones was at 14,000 (the peak was October 9, 2007) and housing prices were only slightly off their peak. Given the collapse of the financial markets and the economy, this paper uses the 2007 SCF data as a starting point in evaluating the condition of 401(k)s and the factors that affect participation and contributions and relies on more recent data and estimates to paint a full and current picture. The analysis proceeds as follows. The first section describes the evolution of 401(k) plans and how the Pension Protection Act of 2006 would be expected to improve the performance of these plans. The second section uses data from the 2007 SCF and other sources to update previous findings on participation, contribution levels, investments, and withdrawals. The third section explores in more depth the role how individual characteristics and plan design affect participation and contributions in 401(k) plans. The fourth section then projects how the events of 2008 have affected various aspects of 401(k) plans. The final section concludes that whereas 401(k) plans were showing some improvement in 2007 and the analysis of participation and contribution decisions confirmed the trend toward auto-enrollment and the maturation of the system, the events of 2008 highlight the limitations of 401(k) plans in serving as the only supplement to Social Security.

Are All Americans Saving 'Optimally' for Retirement?

by John Karl Scholz and Ananth Seshadri
SSA Project # UM08-01 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2008-189

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Many people fear that Americans are preparing poorly for retirement. But developing rigorous evidence on this issue is difficult. In this paper we briefly discuss evidence on the adequacy of retirement wealth accumulation. We conclude that existing descriptive evidence does not seem consistent with dire assessments of poor financial preparation. We then extend the straightforward, but computationally complex dynamic programming approach used in our earlier work to assess the adequacy of retirement wealth preparation of Americans born before 1954. We find only 4 percent of HRS households have net worth below their optimal targets in 2004, though this percentage is somewhat higher for more recent HRS cohorts. While our work is preliminary, we find little evidence that Americans born before 1954 have prepared poorly for retirement.

Are Retirees Falling Short? Reconciling the Conflicting Evidence

by Alicia H. Munnell, Matthew S. Rutledge, and Anthony Webb
SSA Project # BC14-07 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2014-16

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This paper examines conflicting assessments of whether people will have adequate retirement income to maintain their pre-retirement standard of living. The studies that it examines use data from the Survey of Consumer Finances (SCF), the Health and Retirement Study (HRS), and the HRS supplement Consumption and Activities Mail Survey (CAMS). Critical components of the analysis are behavioral assumptions about household consumption patterns when children leave home and when households retire. A key limitation is that the behavioral assumptions in the different studies are based on incomplete knowledge of actual household behavior.

Asset Allocation and Location over the Life Cycle with Survival-Contingent Payouts

by Wolfram J. Horneff, Raimond H. Maurer, Olivia S. Mitchell, and Michael Z. Stamos
SSA Project # UM08-24 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2008-177

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This paper shows how lifelong survival-contingent payouts can enhance investor wellbeing in the context of a portfolio choice model which integrates uninsurable labor income and asymmetric mortality expectations. Our model generates optimal asset location patterns indicating how much to hold in liquid versus illiquid survival contingent payouts over the lifetime, and also asset allocation paths, showing how to invest in stocks versus bonds. We confirm that the investor will gradually move money out of her liquid saving into survival-contingent assets to retirement and beyond, thereby enhancing her welfare by as much as 50 percent. The results are also robust to the introduction of uninsurable consumption shocks in housing expenses, income flows during the worklife and retirement, sudden changes in health status, and medical expenses.

The Availability and Utilization of 401(k) Loans

by John Beshears, James J. Choi, David Laibson, and Brigitte C. Madrian
SSA Project # NB08-09 • Wealth and Retirement Income
National Bureau of Economic Research Working Paper 17118

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We find that 401(k) loan utilization is related to the types of loan features adopted by firms. 401(k) loan utilization is higher in plans that have lower minimum loan amounts and in plans that allow employees to take out multiple loans. 401(k) loan utilization is lower in plans that have higher loan interest rates.

Borrowing from Yourself: The Determinants of 401(k) Loan Patterns

by Timothy Jun Lu and Olivia S. Mitchell
SSA Project # UM10-10 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2010-221

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This paper explores the determinants of people's decisions to take 401(k) loans. We argue that 401(k) plans do not simply represent retirement saving, but they also provide a means of saving for precautionary purposes. We model factors that rationally would induce people to borrow from their pension plans, and we explain why people do not often use 401(k) loans to replace their more expensive credit card debt. Next we test our hypotheses using a rich dataset and show that people who are liquidity-constrained are more likely to have plan loans, while the better-off take larger loans when they do borrow. Plan characteristics such as the number of loans allowed also influence borrowing and loan size in interesting ways, while loan interest rates have only a small impact.

The Changing Causes and Consequences of Not Working Before Age 62

by Barbara A. Butrica and Nadia Karamcheva
SSA Project # BC11-10 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2012-3

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This study considers nonworking older adults and their channels of support before qualifying for Social Security benefits. Using 18 years of data from the HRS, we analyze nonearners' characteristics, including demographics, health status, lifetime labor force attachment, along with the levels and sources of their income and assets. We explore the effects of various factors on the likelihood of being a nonearner and observe the consequences of not working during one's 50s with regard to poverty, age of Social Security claiming, and overall retirement satisfaction. Finally, we analyze how these relationships have changed over time, particularly after the Great Recession.

Consumption and Differential Mortality

by Michael Hurd and Susann Rohwedder
SSA Project # UM11-17 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2011-254

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Policy decisions about reforming Social Security or Medicare need to be based on an accurate assessment of the economic position of the retiring population. The most direct indicator of economic well-being is consumption. Yet our understanding of how consumption evolves with age is limited because we have been unable to apply good measures of consumption to panel data, data that follow individuals and households over time. The most prominent survey that measures household consumption is the Consumer Expenditure Survey, which collects only cross-sectional data on consumption. The age profile of consumption in cross-section is likely to differ from the age profile that individuals and households will actually follow because of differential mortality: The poor die sooner than the well-to-do. Thus, average cross-sectional consumption could increase with age simply because the members of a cohort who survive to advanced old age are likely to have greater economic resources than those who died. Using panel data from the Consumption and Activities Mail Survey, we document the extent of differential mortality in consumption data. We construct age profiles of consumption that are based on three methods?cross-sectional data, true panels, and synthetic panels—and compare them. This comparison shows that cross-sectional age profiles do not provide good estimates of the consumption trajectories that individuals and households follow: the cross-sectional profiles decline more slowly with age than the panel profiles. Thus, the results of cross-sectional profiles overestimate the needs of individuals and households for economic resources in retirement.

Deferred Annuities and Strategic Asset Allocation

by Wolfram J. Horneff and Raimond H. Maurer
SSA Project # UM08-24 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2008-178

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The optimal portfolio choice and consumption pattern has been derived over the lifecycle for households facing labor income, capital market, and mortality risk. In addition to stocks and bonds, households also have access to deferred annuities. Deferred annuities offer a hedge against mortality risk and provide similar benefits as Social Security. The paper shows that a considerable fraction of wealth should be annuitized to skim the return enhancing mortality credit. The remaining liquid wealth (stocks and bonds) is used to hedge labor income risk during work life and to earn the equity premium. There seems to be a marginal difference between a strategy involving deferred annuities and one where the investor can purchase immediate life annuities.

The Design of Retirement Saving Programs in the Presence of Competing Consumption Needs

by Andrew Samwick
SSA Project # NB09-09 • Wealth and Retirement Income
National Bureau of Economic Research

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This project considers the optimal design of Social Security taxes when households' saving decisions include motives like housing, education, and uncertainty in addition to retirement. At issue is the timing, not the expected present value, of taxes over the working lifetime. A 10-year, revenue-neutral delay in the onset of payroll taxes generates a welfare gain equal to approximately 18 percent of one year of annualized income. This is equivalent to giving a typical worker $8,000 of assets upon entering the work force. Welfare gains from revenue-neutral payroll tax delays are larger when individuals must also save to overcome down payment constraints on housing purchases near the beginning of their work lives and slightly lower when they must save later in their work lives to finance college educations for their children.

The Disappearing Defined Benefit Pension and its Potential Impact on the Retirement Incomes of Boomers

by Barbara A. Butrica, Howard M. Iams, Karen E. Smith, and Eric J. Toder
SSA Project # BC08-09 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2009-2

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The long-term shift in coverage from defined benefit (DB) pensions to defined contribution (DC) plans may accelerate rapidly as more large companies freeze their DB pensions and replace them with new or enhanced DC plans. This paper uses the Model of Income in the Near Term to simulate the impact of an accelerated transition from DB to DC pensions on the distribution of retirement income among boomers. A scenario in which employers freeze all remaining private sector DB plans and a third of all state and local plans over the next five years will on balance produce more losers than winners among boomers and reduce their average incomes at age 67. Income changes will be largest among higher-income boomers, who have the highest DB coverage rates and projected pension incomes. Furthermore, the numbers of winners and losers and net income changes are much greater for the last wave of boomers (born between 1961 and 1965) than for earlier boomers. Younger boomers are most likely to have their DB pensions frozen with relatively little job tenure and to lose their high accrual years for DB pension wealth, but also to have relatively more years to accumulate DC pension wealth before retirement. More than any other birth cohort, the boomer cohorts face increased risks from an accelerated shift from DB to DC pensions. Individual outcomes will depend on the magnitude of DB pension losses, participation and contribution rates in the new DC pension plans, and investment returns on retirement account assets. While most boomers will experience modest changes in income, an accelerated decline in DB coverage will reduce incomes by at least 5 percent for about 10 percent of last wave boomers.

Do Couples Self-Insure? The Effect of Informal Care on a Couple's Labor Supply

by Norma B. Coe, Meghan Skira, and Courtney Harold Van Houtven
SSA Project # BC11-11 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2011-16

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How does informal care provision to an elderly parent affect the labor supply outcomes of a couple? Previous work examines the relationship between caregiving and the labor market decisions of the care provider, but ignores any labor supply response of the spouse to such decisions. Using data from the Health and Retirement Survey, we examine how informal care provision affects the labor supply of both members of a couple, at both the intensive and extensive margins. Such analysis is especially important for evaluating informal care's potential effect on retirement timing and household wealth accumulation. We find that providing personal care to an elderly parent reduces a married man's chance of working by 3.2 percentage points, but providing such care does not affect a married woman's chance of working. Additionally, male labor force decisions remain inelastic in response to the wife's caregiving behavior. Working married women do adjust their hours of work in response to caregiving, but in the opposite direction that within-couple insurance would suggest. Instead, the woman increases her work by one hour a week if she is the only care provider, and decreases her work when the husband is the only care provider. When both members of the couple provide informal care these effects cancel out.

Do Health Problems Reduce Consumption at Older Ages?

by Barbara A. Butrica, Richard W. Johnson, and Gordon B.T. Mermin
SSA Project # BC08-07 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2009-9

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High out-of-pocket health care costs may have serious repercussions for older people and their families. If their incomes are not sufficient to cover these expenses, older adults with health problems may have to deplete their savings, turn to family and friends for financial help, or forego necessary care. Or they may be forced to reduce their consumption of other goods and services to pay their medical bills. This paper uses data from the Health and Retirement Study (HRS) and the related Consumption and Activities Mail Survey (CAMS) to examine the impact of health problems at older ages on out-of-pocket health care spending and other types of expenditures. The analysis estimates fixed effects models of total out-of-pocket health care spending, out-of-pocket health care spending exclusive of premiums, total spending on all items except health care, and total spending on all items except health care and housing. The models are estimated separately for households ages 65 and older and those ages 51 to 64. The results show that medical conditions increase health spending, particularly for house holds ages 51 to 64, but that health conditions do not generally reduce non-health spending. Medical conditions do, however, reduce non-health spending for low-income house holds ages 51 to 64, suggesting that holes in the health safety net before the Medicare eligibility age force some low-income people to lower their living standards to cover medical expenses.

The Downside of Defaults

by Jeffrey R. Brown, Anne M. Farrell, and Scott J. Weisbenner
SSA Project # NB11-01 • Wealth and Retirement Income
National Bureau of Economic Research

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The use of default options to influence behavior in the retirement savings arena has expanded significantly in recent years. While the use of defaults is sometimes portrayed as a Pareto improvement because it guides behavior without constraining individual choice, the welfare implications of defaults depends critically on why people default and whether the default is well-suited to those affected. In this paper, we use survey and administrative data on participants in a large public retirement system to explore who defaults on an important economic decision, why they default, and whether they subsequently regret their decision (or lack of decision). We find that information problems are an important contributor to the likelihood of default. We show that the likelihood of default increases with information problems, and that this holds true even after controlling for general and decision-specific knowledge, preferences and beliefs, and a variety of socioeconomic characteristics. We also find significant heterogeneity in the self-reported reasons for default, with sizable numbers of participants attributing their default to each of the commonly hypothesized reasons (e.g., endorsement effects, complexity, and procrastination), as well as to "deliberate defaulting" by those who believe the default option represented the best choice, and to beliefs that the decision was not important. We also find that individuals who are passively defaulted are substantially more likely to regret their decision (as measured by whether they would make the same choice today) than individuals who make an active choice. In total, our results suggest that there are potentially important negative welfare consequences when default options are used for complex, high-stakes welfare decisions.

Economic Consequences of the Great Recession: Evidence from the Panel Study of Income Dynamics

by Barry Bosworth
SSA Project # BC11-09 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2012-4

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The paper uses micro-survey data from successive waves of the Panel Study on Income Dynamics to investigate the distribution of wealth and job losses during the 2007–09 recession for different segments of the population, and the effect of the recession on retirement decisions of older workers. Estimates of wealth loss are constructed for major socioeconomic groups and compared with those of the Survey of Consumer Finances. The panel dimension of the data is used to measure change in the labor force status of workers and to estimate the determinants of the decision to transition from participation in the labor force to retirement. The study concludes that retirement decisions are influenced both by variations in labor market conditions and the value of household wealth, but the labor market exerts a larger impact.

The Effects of the Financial Crisis on Actual and Anticipated Consumption

by Michael Hurd and Susann Rohwedder
SSA Project # UM11-10 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2011-255

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As policy makers consider changes to the Social Security and Medicare programs, it is important to know how the economic status of the older population was impacted by the financial crisis and the Great Recession. Because consumption is the best measure of material well-being we estimate the effect of the recession on spending in the older population based on data from the Health and Retirement Study and the Consumption and Activities Mail Survey. Our method is to compare spending change between 2007 and 2009 with spending change over three previous "normal" transitions: 2001–2003, 2003–2005 and 2005–2007. We find that spending declined from 2007 to 2009 by 3.6 to 7.0 percentage points more than would be expected based on the changes from the earlier two-year time periods where the range is due to differing statistical methods. We compared changes in spending by stock owners with changes in spending by nonowners both in the years 2001–2007 and in 2007–2009. We found that owners reduced spending by an additional 3.8 to 6.2 percentage points compared with nonowners over the 2007 to 2009 period. These results are consistent with an effect of stock market losses on spending, but there are other possible contributing factors such as losses of housing equity. Those who became unemployed between 2007 and 2009 reduced spending by about 19%, indicating a lack of complete insurance against unemployment. We conclude that the shocks generated by the Great Recession substantially affected the economic position of the older population as indicated by the reduction in spending.

The Efficiency of Pension Menus and Individual Portfolio Choice in 401(k) Pensions

by Ning Tang, Olivia S. Mitchell, Gary R. Mottola, and Stephen P. Utkus
SSA Project # UM09-07 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2009-203

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Though millions of US workers have 401(k) plans, few studies evaluate participant investment performance. Using data on over 1,000 401(k) plans and their participants, we identify key portfolio investment inefficiencies and attribute them to offered investment menus versus individual portfolio choices. We show that the vast majority of 401(k) plans offers reasonable investment menus. Nevertheless, participants "undo" the efficient menu and make substantial mistakes: in a 20-year career it will reduce retirement wealth by one-fifth, in fact, more than what a naive allocation strategy would yield. We outline implications for plan sponsors and participants seeking to enhance portfolio efficiency: don't just offer or choose more funds, but help people invest smarter.

The Efficiency of Pension Plan Investment Menus: Investment Choices in Defined Contribution Pension Plans

by Olivia Mitchell and Ning Tang
SSA Project # UM08-20 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2008-176

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Few previous studies have explored whether defined contribution retirement saving plans offer sufficiently diversified investment menus, though it is likely that these menus significantly shape workers' accumulations of retirement wealth. This paper assesses the efficiency and performance of 401(k) investment options offered by a large group of US employers. We show that the majority of plans is efficient compared to market benchmark indexes. Three performance measures underscore the fact that these plans tend to offer a sensible investment menu, when measured in terms of the menus' mean-variance efficiency, diversification, and participant utility. The key factor contributing to plan efficiency and performance is the particular set of funds offered, rather than the total number of investment options provided. We conclude that, in 401(k) arena, "more" is not necessarily "better."

Evaluating Micro-Survey Estimates of Wealth and Saving

by Barry P. Bosworth and Rosanna Smart
SSA Project # BC08-04 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2009-4

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This paper presents an overview of changes in household wealth accumulation and saving using wealth data from three micro-level surveys: Survey of Consumer Finances (SCF), Panel Study of Income Dynamics (PSID), and Health and Retirement Study (HRS). We provide comparisons to the macroeconomic estimates of wealth accumulation and saving, explore problems in constructing household-level valuations of wealth, and assess the value of using household-level datasets to examine wealth accumulation and saving behavior in the United States. Our first analysis compares the macroeconomic estimates of wealth from the Flow of Funds to comparable measures from the SCF, PSID and HRS. The Flow of Funds and SCF valuations of net worth correspond closely up to 1998. Yet, after 1998, the SCF reports a much more rapid acceleration of wealth, concentrated in equity-type assets. The estimates of wealth in the PSID and HRS are very similar to the SCF for the bottom 95 percent of the wealth distribution, diverging only for the top 5 percent of households. Second, we evaluate the extent of bias in the wealth estimates that may have developed in the longitudinal surveys due to attrition. We conclude that both surveys remain very representative of the underlying population as judged by a comparison with the lower 95 percent of households in the SCF. We also use the longitudinal data to estimate the relationship between wealth and mortality, and adjustment factors for differential mortality that can be used to adjust the age-wealth profile obtained from cross-sectional surveys, such as the SCF. The result is greater evidence of wealth decumulation at older ages. Finally, we use the panel nature of the PSID and HRS to construct household-level measures of wealth accumulation and partition those changes between the contribution of new saving and valuation changes. The overall changes in wealth match the macroeconomic data closely, showing a secular rise in wealth-income ratios. Although the measures of saving do demonstrate consistent differences in saving among major socio-economic groups, they do not reflect the general decline in saving rates that is apparent in the aggregate data for the past two decades.

Extending Life Cycle Models of Optimal Portfolio Choice: Integrating Flexible Work, Endogenous Retirement, and Investment Decisions with Lifetime Payouts

by Jing Jing Chai, Wolfram J. Horneff, Raimond H. Maurer, and Olivia S. Mitchell
SSA Project # UM09-12 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2009-204

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This paper derives optimal life cycle portfolio asset allocations as well as annuity purchases trajectories for a consumer who can select her hours of work and also her retirement age. Using a realistically-calibrated model with stochastic mortality and uncertain labor income, we extend the investment universe to include not only stocks and bonds, but also survival-contingent payout annuities. We show that making labor supply endogenous raises older peoples' equity share; substantially increases work effort by the young; and markedly enhances lifetime welfare. Also, introducing annuities leads to earlier retirement and higher participation by the elderly in financial markets. Finally, when we allow for an age-dependent leisure preference parameter, this fits well with observed evidence in that it generates lower work hours and smaller equity holdings at older ages as well as sensible retirement age patterns.

Family Status Transitions, Latent Health, and the Post-Retirement Evolution of Assets

by James Poterba, Steven Venti, and David A. Wise
SSA Project # NB09-03 • Wealth and Retirement Income
National Bureau of Economic Research

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This study explores the evolution of assets after retirement. It focuses on two questions: first, whether the drawdown of assets is triggered by shocks to family status, and second, how the evolution of assets is related to health status. It uses longitudinal HRS data from 1992 to 2006, following households across two-year intervals between waves, and evaluating how their asset balances change as they age from one survey wave to the next.
One major finding is that households without major family status transitions tend to conserve their assets, even allowing them to grow further into older age. By contrast, people in households that experience a family status transition during an interval—by becoming widowed or divorced—often experience a large decline or no increase in total assets. Both the level and evolution of household assets is strongly related to health. People in better health have more assets to begin with, and more continuing growth of those assets into older ages. For continuing two-person HRS households age 56 to 61 in 1992, for example, the ratio of assets of persons in the top health quintile to the assets of persons in the bottom quintile is 1.7 in 1992. By the end of 2006 the ratio of assets in the top quintile to assets in the bottom quintile was over 2.2.

Fees and Trading Costs of Equity Mutual Funds in 401(k) Plans and Potential Savings from ETFS and Commingled Trusts

by Richard W. Kopcke, Francis M. Vitagliano, and Zhenya S. Karamcheva
SSA Project # BC09-06 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2009-27

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As the role of 401(k) and similar defined-contribution plans continues to expand in our retirement system, plan participants are paying more of the cost of financing their retirement income. This study analyses the trading costs and fees of the 100 largest domestic equity mutual funds held in defined-contribution pension plans for the years 2004 through 2008. The pricing of the actively managed funds in this sample cost the average plan 0.50 of a percentage point or more in annual returns. By shifting investment options from managed mutual funds to exchange-traded funds (ETFs) or commingled trusts, 401(k) plans can align the fees they pay more closely with the expense of the services they use. This realignment can allow an average plan to reduce its administration and management fees between 0.20 and 0.40 percent of assets. In addition, the shift to ETFs and commingled trusts that hold ETFs can reduce average trading costs 0.50 percent of assets or more for participants holding managed equity mutual funds. The fees and trading costs of the domestic equity funds in this sample are not correlated with the performance of the funds. The funds with the greatest expenses tended to divide evenly between those funds that outperformed and those that underperformed the market by the largest margins.

Financial Capability in the United States: Consumer Decision-Making and the Role of Social Security

by Annamaria Lusardi
SSA Project # UM10-22 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2010-226

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This paper analyzes new data from the 2009 National Financial Capability Study. This survey provides information to assess how American households make financial decisions, how they are faring under current economic conditions, and in what ways financial knowledge contributes to financial capability. In addition, it includes data about the information that the Social Security Administration (SSA) provides to consumers. The paper finds that the majority of individuals do not plan for retirement or make provisions against shocks. Debt management often results in sizable interest payments and fees and it is notable how many individuals have used high-cost methods of borrowing in the past five years. Levels of financial knowledge are strikingly low and many respondents do not possess knowledge of basic concepts. Social Security has taken steps to provide information about what individuals will expect to receive when they retire. The self-reported evidence provided in the survey shows that the information has been used by about a quarter of the population who acknowledge receiving the statement. Moreover, there are large differences among use in demographic groups and some of the more vulnerable populations, such as African-Americans, those hit by shocks, and single and separated individuals are more likely to use the statement.

Financial Literacy among the Young

by Annamaria Lusardi, Olivia S. Mitchell, and Vilsa Curto
SSA Project # UM08-12 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2008-191

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We examined financial literacy among the young using data from the 1997 National Longitudinal Survey of Youth. We showed that financial literacy is low among the young; fewer than one-third of young adults possess basic knowledge of interest rates, inflation, and risk diversification. Financial literacy is strongly related to sociodemographic characteristics and family financial sophistication. Specifically, a college-educated male whose parents had stocks and retirement savings is about 50 percentage points more likely to know about risk diversification than a female with less than a high school education whose parents were not wealthy. These findings have implications for consumer policy.

Financial Literacy and Financial Sophistication in the Older Population: Evidence from the 2008 HRS

by Annamaria Lusardi, Olivia S. Mitchell and Vilsa Curto
SSA Project # UM09-10 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2009-216

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This paper analyzes new data on financial literacy and financial sophistication from the 2008 Health and Retirement Study. We show that financial literacy is lacking among older individuals and for the first time explore additional questions on financial sophistication which proves even scarcer. For this sample of older respondents over the age of 55, we find that people lack even a rudimentary understanding of stock and bond prices, risk diversification, portfolio choice, and investment fees. In view of the fact that individuals are increasingly required to take on responsibility for their own retirement security, this lack of knowledge has serious implications.

Getting to the Top of Mind: How Reminders Increase Saving

by Dean Karlan, Margaret McConnell, Sendhil Mullainathan, and Jonathan Zinman
SSA Project # BC08-S1 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2010-4

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We develop and test a simple model of limited attention in intertemporal choice. The model posits that individuals fully attend to consumption in all periods but fail to attend to some future lumpy expenditure opportunities. This asymmetry generates some predictions that overlap with other models of present-bias. Our model also generates the unique predictions that reminders will increase saving, and that a reminder that makes a specific expenditure more salient will be especially effective. We find support for these predictions in three field experiments that randomly assign reminders to new savings account holders.

Health Care, Health Insurance, and the Relative Income of the Elderly and Nonelderly

by Gary Burtless and Pavel Svaton
SSA Project # BC08-11 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2009-10

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Cash income offers an incomplete picture of the resources available to finance household consumption. Most American families are covered by an insurance plan that pays for some or all of the health care they consume. Only a comparatively small percentage of families pays for the full cost of this insurance out of their cash incomes. As health care has claimed a growing share of consumption, the percentage of care that is financed out of household incomes has declined. Because health care consumption is more important for some groups in the population than others, the growth in spending and changes in the payment system for medical care have reduced the value of standard income measures for assessing relative incomes across age groups and across the income distribution. More than a seventh of total personal consumption now consists of health care that is purchased with government insurance and employer contributions to employee health plans. In this paper we combine health care spending and insurance reimbursement data in the Medical Expenditure Panel Study with cash and non-cash income data in the Current Population Survey to assess the impact of health insurance on the distribution of income and, in particular, on the age profile of income. Our estimates imply that gross money income and disposable cash and near-cash income significantly understate the resources available to finance household purchases. The estimates imply that a more complete measure of resources would show less inequality than the income measures that are currently used. The addition of estimates of the value of health insurance to countable incomes reduces measured inequality in the population and the income gap between young and old. Standard income measures imply that households with an aged household head have significantly lower average and median incomes than households with a head who is less than 55. In contrast, an income definition that includes value of health insurance implies that aged households have higher incomes than households with a non-aged head.

Heterogeneity in Target-Date Funds and the Pension Protection Act of 2006

by Pierluigi Balduzzi and Jonathan Reuter
SSA Project # NB11-02 • Wealth and Retirement Income
National Bureau of Economic Research

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This paper studies the evolution of the market for target-date funds (TDFs) during the 1994–2009 period. We document pronounced heterogeneity in the TDF universe: TDFs with the same target date have delivered very different returns because of differences in systematic risk in the stock allocations and because of differences in the stock vs. bond allocations. This heterogeneity has increased over time, especially after the passage of the Pension Protection Plan of 2006. Indeed, we can attribute the increased heterogeneity to the entry of new fund families in the TDF market during the 2007–2009 period. These developments in the TDF market are consistent with new entries in the market adopting a product-differentiation strategy. Our findings suggest that the widespread adoption of TDFs will not result in returns that are similar across investors enrolled in different 401(k) plans, and that the current proposals for further disclosure in TDF offerings may have little impact on the incentive for fund families to offer similar risk profiles.

The Housing Bubble and Retirement Security

by Alicia H. Munnell and Mauricio Soto
SSA Project # BC08-13 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2008-13

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House prices rose 60 percent between 2000 and 2007 before the housing bubble burst. The question is whether the housing boom made people better or worse prepared for retirement. Theory says that infinitely-lived households experience no increase in their real net worth when housing prices increase and would therefore have no reason to borrow against the increment in their home equity to increase their consumption. Two pieces of evidence suggest that they did tap their equity: the big increase in mortgage borrowing has accompanied the run-up in house prices, and a number of studies have reported a positive relationship between house prices and consumption. Using the 2004 Survey of Consumer Finances (SCF) this paper investigates the probability of households extracting home equity through an increase in housing-related debt, the probability that they use their housing-related borrowing for consumption, and finally the factors that determine the level of consumption spending out of their increased debt. The results show that while homeowners appear to take the present discounted value of future rents into account, many of them extracted equity and used it for consumption. A substantial proportio—perhaps 30 percent—of older households will be less secure in retirement because of the housing bubble.

How Did the Recession of 2007–2009 Affect the Wealth and Retirement of the Near Retirement Age Population in the Health and Retirement Study?

by Alan L. Gustman, Thomas L. Steinmeier, and Nahib J. Tabatabai
SSA Project # UM11-08 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2011-253

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Data from the Health and Retirement Study is used to investigate how the "Great Recession" affected the wealth and retirement of the near retirement population, ages 53 to 58 in 2006. Due to falling house prices, their retirement wealth fell by 2.8 percent between 2006 and 2010. In contrast, in past years members of older cohorts had added 5 percent to their assets over the comparable age span. Cushioned by Social Security, the retirement wealth of poorer households was less affected by the recession. Labor market effects of the Great Recession were more modest. The changes in full-time work and retirement are similar to the changes observed for members of older cohorts at comparable ages.

How Do Pension Changes Affect Retirement Preparedness? The Trend to Defined Contribution Plans and the Vulnerability of the Retirement Age Population to the Stock Market Decline of 2008–2009

by Alan L. Gustman, Thomas L. Steinmeier, and Nahib Tabatabai
SSA Project # UM09-09 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2009-206

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Our findings suggest that although the consequences of the decline in the stock market are serious for those approaching their retirement, the average person approaching retirement age is not likely to suffer a life changing financial loss from the stock market downturn of 2008–2009. Similarly, the likely effects of the stock market downturn on retirements have been greatly exaggerated. If there is any postponement of retirement due to stock market losses, on average it will be a matter of a few months rather than years. Counting layoffs, retirements may be accelerated rather than reduced. Background information from our forthcoming book also corrects misperceptions about pension holdings of the retirement age population. Pension coverage is much more extensive than is usually recognized. Over three quarters of the households with a person ages 51 to 56 in 2004 are currently covered by a pension, or have enjoyed pension coverage in the past. Pension wealth accounts for 23 percent of the total wealth of those on the cusp of retirement. For those nearing retirement age, defined contribution plans remain immature. As a result, almost two thirds of pension wealth held by those 51 to 56 in 2004 is in the form of a defined benefit plan. Lastly, women approaching retirement age are more likely to be covered by a pension than are women from earlier cohorts and they account for a significantly larger share of household pension wealth.

How Does Simplified Disclosure Affect Individuals' Mutual Fund Choices?

by John Beshears, James J. Choi, David Laibson, and Brigitte C. Madrian
SSA Project # NB08-Q4 • Wealth and Retirement Income
National Bureau of Economic Research

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We conduct an investment experiment designed to evaluate how the SEC's Summary Prospectus proposal—which seeks to simplify mutual fund disclosure—affects individual investors' mutual fund choices. Our subjects are Harvard staff members who allocate one equity portfolio and one bond portfolio. Subjects are randomly assigned to receive either statutory prospectuses or Summary Prospectuses. We find no evidence that the Summary Prospectus affects the quality of portfolio choices. The principal welfare gain from the Summary Prospectus appears to come from allowing investors to spend less time and effort to arrive at a portfolio decision similar to what they would have chosen after reading only the statutory prospectus.

How Is Hardship Avoided for Those Retiring Before Social Security Entitlement Ages?

by Kevin Milligan
SSA Project # NB11-06 • Wealth and Retirement Income
National Bureau of Economic Research

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Governments around the world are reacting to extended lifespans and troubled pension finances by increasing the age of retirement benefit entitlement. One concern that arises is how those who are not working before reaching entitlement age are able to bridge their consumption to the age of entitlement. This paper studies those who retire before the age of full pension entitlement in the United States using data drawn from the Health and Retirement Study. The major finding is that four out of five people who have zero earnings at pre-entitlement ages are able to find a way to lift their incomes over the poverty line. For men, pension and annuity income is important while for women, spousal income helps most to get them over the line. Reaching the early retirement entitlement age at 62 also has a significant impact on poverty avoidance.

How Much Do Respondents in the Health and Retirement Study Know about Their Tax-deferred Contribution Plans? A Cross-cohort Comparison

by Irena Dushi and Marjorie Honig
SSA Project # UM08-05 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2008-201

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We use information from Social Security earnings records to examine the accuracy of employee reports of annual contributions to tax-deferred pension plans. As employer defined benefit pensions are replaced by voluntary contribution plans, employee understanding of the link between annual contribution decisions and post-retirement wealth is becoming increasingly important. We compare the accuracy of employee reports of annual contributions in a sample of respondents in the original HRS cohort and in a sample of two younger cohorts, the War Babies and Early Baby Boomers. Tax-deferred plans are more common among the younger cohorts and we expected that they would be better informed about their annual contributions. We find that, among respondents for whom SSA administrative records are available, those in the younger cohorts were more likely to report accurately that they were included in a tax-deferred plan. Contrary to our expectation, identical proportions (70 percent) of respondents in both the older and the younger cohorts accurately reported whether they made a contribution during the interview year. Furthermore, we find no significant difference between the older and younger cohorts in the degree of reporting accuracy of contribution amounts, with approximately one-half of respondents in each cohort reporting contributions within plus/minus 25 percent of the true value. Both cohorts' self-reported contributions are systematically larger than the true values. Finally, both self-reported and W-2 contributions are significantly larger among respondents in the WB/EBB cohort.

How Seniors Change Their Asset Holdings During Retirement

by Karen Smith, Mauricio Soto, and Rudolph G. Penner
SSA Project # BC09-09 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2009-31

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We use 1998–2006 waves of the Health and Retirement Study (HRS) to investigate how households change their asset holdings at older ages. We find a notable increase in the net worth of older households between 1998 and 2006, with most of the growth due to housing. Our results indicate that, through 2006, older households did not spend all their capital gains. This asset accumulation provides older households with a financial cushion for the turbulence experienced after 2007. The wealth distribution is highly skewed, and the age patterns of asset accumulation and decumulation vary considerably by income group. High-income seniors increase assets at older ages. Middle-income seniors reduce their assets in retirement, but at a rate that for most seniors will not deplete assets within their expected life. Many low-income seniors accumulate fewer assets and spend their financial assets at a rate that will mostly deplete them at older ages, leaving low-income seniors with only Social Security and DB pension income at older ages.

How Well Are Social Security Recipients Protected from Inflation?

by Gopi Shah Goda, John B. Shoven, and Sita Nataraj Slavov
SSA Project # NB09-14 • Wealth and Retirement Income
National Bureau of Economic Research

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Social Security is widely believed to protect its recipients from inflation because benefits are indexed to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). However, the CPI-W may not accurately reflect the experience of retirees for two reasons. First, retirees generally have higher medical expenses than workers, and medical costs, in recent years, have tended to rise faster than the prices of other goods. Second, even if medical costs did not rise faster than the prices of other goods, as retirees aged, their medical spending would still tend to increase as a share of income; that is, each cohort of retirees would still see a decline in the real income left over for non-medical spending. We show that Social Security benefits net of average out-of-pocket medical expenses have declined relative to a price index for non-medical goods by almost 20 percent for men, and almost 27 percent for women, in the 1918 birth cohort. We also explore the extent to which indexing Social Security benefits to the CPI-E, an experimental measure of inflation for the elderly, would change these results.

Identifying Local Differences in Retirement Patterns

by Leora Friedberg, Michael Owyang, and Anthony Webb
SSA Project # BC08-14 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2008-18

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The ability to retire at an age and in a manner of one's choosing depends on one's ability to retain or find employment at older ages, which depends in turn on local labor market conditions. We investigate how local labor markets affect retirement transitions. We match households from the Health and Retirement Study to MSA unemployment rates and estimate multinomial logit regressions on annual job transitions. We find that the MSA unemployment rate has large and statistically significant effects on job transitions. The estimated effects are stronger for men than women and tend to be stronger for semi-skilled workers. The unemployment rate has a negative effect on the likelihood of voluntary exit to either a new job (especially part-time) or retirement, and a positive effect on involuntary exit to retirement. A one percentage point increase in the MSA unemployment rate raises the likelihood of voluntary exit to a new job by 8.5 percent, reduces the likelihood of voluntary exit to retirement by 1.9 percent, and raises the likelihood of involuntary exit to retirement by 5.7 percent. Thus, high unemployment rates raises involuntary exits and constrains the ability of others to transition into retirement in a manner of their choosing.

The Impact of 401(k) Loans on Saving

by John Beshears, James J. Choi, David Laibson, and Brigitte C. Madrian
SSA Project # NB09-05 • Wealth and Retirement Income
National Bureau of Economic Research

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Although the popular press and politicians often describe 401(k) loans as a problem, classical economic theory has a more benign view. Loans from a 401(k) can relax liquidity constraints and increase household utility. Moreover, loan provisions may have the subtle effect of raising net asset accumulation by making 401(k) participation more appealing: employees who can access their 401(k) assets if they need them may be willing to put more money into an otherwise illiquid 401(k) account. Our research suggests that 401(k) loans are neither a blessing nor a bogeyman. Conditional on borrowing to finance consumption, we show that a 401(k) loan may be a reasonable source of credit in many circumstances. We further show that the net impact of 401(k) loans on asset accumulation is likely to be small (and could be either positive or negative) for a reasonable range of parameter assumptions.

The Impact of Changing Earnings Volatility on Retirement Wealth

by Austin Nichols and Melissa Favreault
SSA Project # BC08-10 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2008-14

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Over the last several decades, the volatility of family income has increased markedly, and own earnings volatility has remained relatively flat. Volatility may affect retirement wealth, depending on whether volatility affects accrued pension contributions or withdrawals or earnings credited toward future Social Security benefits. This project assesses the effect of the volatility of individual and family earnings on asset accumulation and projected retirement wealth using survey data matched to administrative earnings records.

Incorporating Employee Heterogeneity Into Default Rules For Retirement Plan Selection

by Gopi Shah Goda and Colleen Flaherty Manchester
SSA Project # BC09-S3 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2010-6

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This paper examines the effect of incorporating individual-level heterogeneity into default rules for retirement plan selection. We use data from a large employer that transitioned from a defined benefit (DB) plan to a defined contribution (DC) plan, offering existing employees a choice of plans. Employees who did not make a choice were defaulted to switch to the DC plan if under age 45 or remain in the DB plan if age 45 or older. Using a regression discontinuity framework, we estimate that the default increased the probability of enrolling in one plan over the other by 60 percentage points. We develop a framework to solve for the optimal age-based default rule analytically and use our results to empirically evaluate the optimal age-based default rule for the firm in our setting. We show that for a broad range of levels of risk aversion, conditioning the default for the choice between pension plans on age can subs! tantially improve outcomes relative to a uniform default policy. Our results suggest that considerable welfare gains are possible by varying defaults by observable characteristics.

The Influence of Public Policy on Health, Wealth and Mortality

by John Karl Scholz and Ananth Seshadri
SSA Project # UM11-12 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2011-252

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We develop a model of health capital, which is enhanced by investments of time and money but subject to depreciation and age-dependent random shocks. We embed this model into a sophisticated model of intertemporal consumption. Doing so allows us to study two behavioral responses that to date have not been explored: the tradeoff between consumption and health investments and the effects of policy on longevity. When matching the model and data, we find consumption and health are complements, meaning that as health depreciates with age, households will get less utility from consumption. This result has implications for the timing of consumption over the lifecycle. Households will want to move consumption earlier in the lifecycle, which in turn implies households need less wealth to maintain living standards in retirement relative to the implications of a model that ignores health capital. It appears that forward-looking households, when confronted by a substantially reduced safety net, may respond by reducing consumption and by reducing their health investment. Large non-health related policy changes can affect survival probabilities of low-lifetime-income households. There are potentially important differences between short- and long-run responses to policy. Changes in survival probabilities over a decade, even to very large policies affecting the elderly, can be small because health capital is largely determined by the time an individual reaches retirement. Long-run changes can be substantial. Over long periods, young household may alter their mix of health investments and consumption in response to anticipated policies with possibly adverse consequences for longevity.

Is Retiree Demand for Life Annuities Rational? Evidence from Public Employees

by John Chalmers and Jonathan Reuter
SSA Project # NB09-15 • Wealth and Retirement Income
National Bureau of Economic Research

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Economists advise retirees to convert the majority of their retirement assets into life annuities. Yet, the voluntary market for life annuities is small. Explanations for this "under-annuitization puzzle" center on poor financial-decision making. Using data from Oregon's Public Employee Retirement System (PERS) from 1990 to 2003, we study the extent to which individual demand for life annuities versus partial and full lump sum payouts is consistent with rational financial decision-making. The evidence is mixed. On the one hand, as predicted, demand for the full lump sum payout is negatively correlated with its opportunity cost. In addition, demand for partial lump sums is higher when retirees have higher ex post mortality rates or greater tolerance for risk. On the other hand, demand for the partial lump sum payout is positively correlated with its opportunity cost. It is also positively correlated with recent returns on the S&P 500 index, which is consistent with retirees chasing equity returns. Finally, we find evidence of an income effect in the demand for partial lump sum payouts. While higher levels of life annuity payments should be associated with lower demand for incremental life annuity payments, in our setting, the median retiree forfeits $1.50 in expected present discounted value per $1.00 in partial lump sum payout. Overall, our findings suggest that retirees respond rationally to tradeoffs that are easily observed or understood—like health status—but less-than-rationally to tradeoffs that require an understanding of finance to measure—like the opportunity cost of the partial lump sum option.

The Level and Risk of Out-of-Pocket Health Care Spending

by Michael Hurd and Susann Rohwedder
SSA Project # UM09-08 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2009-218

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The Health and Retirement Study (HRS) is a long-running panel survey with good measures of economic status, so it is the pre-eminent data set for studies about the economic status of the older population and economic preparation for retirement. However, the HRS expends considerably fewer resources on the measurement of out-of-pocket spending than other surveys such as the Medical Expenditure Panel Survey (MEPS) and the Medicare Current Beneficiary Survey (MCBS), which may result in its having relatively less accurate measurement of such spending. We compare the level and distribution of out-of-pocket spending in the HRS with similar measures in MEPS and MCBS in the population aged 65 or older. We find that the measures of out-of-pocket spending in the HRS are about 50% greater than those in MEPS at the mean, and very much greater at the upper points of the distribution. HRS and MCBS are in better agreement, although the HRS is higher at the mean and at the top of the distribution. The implication is that the level and risk of out-of-pocket spending on health care are exaggerated in HRS. Observation error in the HRS measurement relative to MEPS and MCBS is to be expected, but this does not explain the apparent bias. We conclude that researchers who use HRS 2004 or earlier should examine health care spending carefully, even on a case-by-case basis.

Lifecycle Impacts of the Financial and Economic Crisis on Household Optimal Consumption, Portfolio Choice, and Labor Supply

by Jingjing Chai, Raimond Maurer, Olivia S. Mitchell, and Ralph Rogalla
SSA Project # UM11-11 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2011-246

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The impact of the financial crisis has been to deal a heavy blow to investment-based pensions; many workers lost a substantial portion of their retirement saving. The financial sector implosion produced an economic crisis for the rest of the economy via high unemployment and reduced labor earnings, which reduced household contributions to Social Security and private pensions. Our research asks which individuals were most affected by these dual financial and economic shocks, and it explores how people may react by changing their consumption, saving, investment, work, and retirement decisions. We do so with a realistically calibrated lifecycle framework allowing for time-varying investments and countercyclical risky labor income.
Our results indicate that some will be able to hedge adverse capital market developments they face in the crisis, by altering their asset allocations, work hours and retirement ages. In particular, we find that when hit by a financial/economic crisis households near-retirement cut their consumption both in the short-term and over the long-term. Moreover, they increase their work effort and postpone retirement. For young cohorts, short-term effects differ from those in the long-run. During the first years after the onset of the crisis, young households will reduce work hours, savings, and equity exposure and suffer from a drop in consumption. In the long run, however, they will work more, retire later, invest more in stocks, consume less, and spend less on annuities. These predictions illustrate the key dimensions along which economic adjustment are likely to occur, in response to the most severe recession since the Great Depression.

Marriage, Employment and Inequality of Women's Lifetime Earned Income

by Chinhui Juhn and Kristin McCue
SSA Project # NB11-07 • Wealth and Retirement Income
National Bureau of Economic Research

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Using Current Population Surveys and Survey of Income and Program Participation data matched to Social Security earnings records, we summarize changes in marital histories for different birth cohorts of women and project the associated changes in women's own lifetime earnings and in spousal earnings. We find that the gap in lifetime earnings between married and single women appears to have essentially closed for less educated women while a small differential still exists for more educated women. The earnings gap across education categories has increased rapidly in terms of women's own lifetime earnings. The level of earnings inequality across education categories is higher when marriage and husbands' earnings is taken into account although the increase is less pronounced. Lifetime earnings of married college-educated women diverged most dramatically from those of less educated single women.

Mortality Contingent Claims: Impact of Capital Market, Income, and Interest Rate Risk

by Wolfram J. Horneff and Raimond H. Maurer
SSA Project # UM09-12 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2009-222

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In this paper, we consider optimal insurance, portfolio allocation, and consumption rules for a stochastic wage earner with CRRA preferences whose lifetime is random. In a continuous time framework, the investor has to decide among short and long positions in mortality contingent claims a.k.a. life insurance, stocks, bonds, and money market investment when facing a risky stock market and interest rate risk. We find an analytical solution for the complete market case in which human capital is exactly priced. We also extend the analysis to the case where income is unspanned. An illustrative analysis shows when the wage earner's demand for life insurance switches to the demand for annuities.

Optimal Portfolio Choice with Fat Tails

by Jialun Li and Kent Smetters
SSA Project # NB09-16 • Wealth and Retirement Income
National Bureau of Economic Research

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The recent financial crisis has highlighted the importance of modeling and managing extreme risk, especially retirement savings. Virtually all standard optimal stock-bond portfolio allocation models, however, assume that risk is normally distributed (bell shape). In reality, stock market risk exhibits "fat tails." Allowing for "fat tails" can add considerable computational complexity to standard optimization framework, which is already quite complicated. This paper demonstrates how to model fat tails using a g-and-h distribution that allows for skewness and kurtosis of arbitrary degree. Unlike alternative extreme value and other coupla approaches, the g-and-h distribution has a well defined pdf, is smooth and satisfies certain regularity conditions that allow for tractable integration. It also appears to fit the data the best. We hope that our modeling approach will open the door for more realistic modeling of retirement income risk in the future. Our own SSA grant proposal for next year will extend the current research by adding a greater degree of fiscal policy institutions that materially can affect saving for retirement.

Participation and Contributions in Tax-deferred Retirement Accounts: Evidence from Social Security Records

by Marjorie Honig and Irena Dushi
SSA Project # UM09-13 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2009-219

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Social Security Administration W-2 records contain employee annual tax-deferred contributions for 1990–2003 and sufficient information to calculate tax-deferred contributions for 1984–1989. We use this information to compare tax-deferred contribution profiles of three cohorts of respondents in the Health and Retirement Study to determine whether younger cohorts saved relatively more at the same stage of the life cycle than had older cohorts. We find that participation in tax-deferred retirement plans increased substantially for all cohorts from 1984 to 2003, and that respondents in more recent cohorts were more likely to participate in such plans than respondents of the same ages in the earliest cohort. Their contributions as a percent of earnings were not significantly larger than those of the earliest cohort, however. Despite the increased availability of these employer-provided plans throughout this period, participation rates and contribution amounts remained low among respondents in the lower half of the earnings distribution.

The Pension Protection Act of 2006 and Diversification of Employer Stock in Defined Contribution Plans

by Gary V. Engelhardt
SSA Project # BC11-08 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2011-20

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This paper estimates the short-run impact of the Pension Protection Act of 2006 (PPA2006) on holdings of employer stock in defined contribution pension plans. PPA2006 allowed participants in plans with employer stock to diversify their holdings. However, stand-alone ESOPs, i.e., those that do not allow employee elective deferrals or after-tax contributions, were exempt from this provision. Using detailed Form 5500 financial data for stand-alone ESOPs and those that allow employee elective deferrals or after-tax contributions, so-called KSOPs, from 2003-5 (before) and 2007-9 (after) the PPA and a quasi-experimental empirical framework, two primary empirical findings emerge. First, the share of plan assets in company stock fell 7 percentage points for KSOPs, because of the diversification provisions in PPA2006, a substantial decline. There was no change in holdings for stand-alone ESOPs. Second, most of the decline occurred in plans that had between 25–50% of plan assets in employer stock. Nonetheless, in 2009 still two-thirds KSOPs had more than 10% of assets in company stock, the statutory limit for defined benefit pension plans.

Personality and Response to the Financial Crisis

by Angela Lee Duckworth and David R. Weir
SSA Project # UM11-09 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2011-260

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In a previous study, we found the family of personality traits known as conscientiousness to be associated in cross-sectional analyses with both lifetime earnings and wealth. In this study, we used data from an Internet survey of HRS respondents in the second quarter of 2009 to test whether conscientiousness and other Big Five factors prospectively predicted responses to the financial crisis of 2008/09. In addition, to improve the targeting and design of behavioral interventions for "at-risk" individuals, we examined two specific facets of conscientiousness (i.e., self-control and perseverance) that may be more highly related to these economic outcomes than other facets. Finally, we used data from the Consumption and Activities Mail Survey (CAMS) to examine whether personality is related to the proportion of income saved versus spent. Missing data precluded sufficiently powerful prospective analyses of personality and responses to the financial crisis. Likewise, data on self-control and perseverance from the 2010 experimental module were not sufficient at the time of final reporting to come to definitive conclusions about how these facets relate to economic outcomes. We did find that conscientious adults save more and spend less of their incomes, whereas adults who are higher in openness to experience (e.g., adventurous, sophisticated) save less and spend more of their income. The robust associations between conscientiousness and economic outcomes suggests further investigation of interventions that improve conscientiousness as well as policies that specifically target less conscientious individuals (e.g., default choices for retirement savings).

Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing and Risky Assets

by Motohiro Yogo
SSA Project # BC08-S8 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2009-3

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This paper develops a consumption and portfolio-choice model of a retiree who allocates wealth among four assets: a riskless bond, a risky asset, a real annuity, and housing. Unlike previous studies that treat health expenditures as exogenous negative income shocks, this paper builds on the Grossman model to endogenize health expenditures as investments in health. I calibrate the model to explain the joint evolution of health status and the composition of wealth for retirees, aged 65 to 96, in the Health and Retirement Study. I use the calibrated model to assess the welfare gains of an actuarially fair annuity market. The welfare gain is less than 1 percent of wealth for the median-health retiree at age 65, and the welfare gain is about 10 percent of wealth for the healthiest.

A Primer on 401(k) Loans

by John Beshears, James J. Choi, David Laibson, and Brigitte C. Madrian
SSA Project # NB08-09 • Wealth and Retirement Income
National Bureau of Economic Research

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Although the popular press and politicians often describe 401(k) loans as a problem, classical economic theory has a more benign view. Loans from a 401(k) can relax liquidity constraints and increase household utility. Moreover, loan provisions may have the subtle effect of raising net asset accumulation by making 401(k) participation more appealing: employees who can access their 401(k) assets if they need them may be willing to put more money into an otherwise illiquid 401(k) account. Our research suggests that 401(k) loans are neither a blessing nor a bogeyman. Conditional on borrowing to finance consumption, we show that a 401(k) loan may be a reasonable source of credit in many circumstances. We further show that the net impact of 401(k) loans on asset accumulation is likely to be small (and could be either positive or negative) for a reasonable range of parameter assumptions. Our empirical analysis also suggests that it may be possible to structure the provision of 401(k) loans in ways that reduce their potential to negatively impact retirement wealth accumulation, as we find that 401(k) loan utilization is responsive to the types of loan features adopted by firms. 401(k) loan utilization is higher in plans that have lower minimum loan amounts and in plans that allow employees to take out multiple loans. 401(k) loan utilization is lower in plans that have higher loan interest rates.

Retirement Security and the Stock Market Crash: What are the Possible Outcomes?

by Barbara A. Butrica, Karen E. Smith, and Eric J. Toder
SSA Project # BC09-Q1 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2009-30

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This paper simulates the impact of the 2008 stock market crash on future retirement savings under alternative scenarios. If stocks remain depressed as after the 1974 crash, 20 percent of pre-boomers born 1941–45 and 22 percent of late boomers born 1961–65 would see their retirement incomes drop 10 percent or more. Working another year would reduce the share of these big losers to 14 percent for late boomers. Because most pre-boomers were already retired, their share of big losers would decline slightly to 19 percent. Delaying retirement would disproportionately benefit low-income people because their additional earnings exceed their stock market losses.

Retirement Wealth Across Cohorts: The Role of Earnings Inequality and Pension Changes

by Ann Huff Stevens
SSA Project # UM08-18 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2008-186

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Changes in labor markets over the past 30 years suggest upcoming changes in the distribution of wealth at retirement. Baby boom cohorts have spent the majority of their prime earnings years in a labor market with increased earnings inequality. This paper investigates how changes in lifetime earnings distributions affect the distribution of retirement wealth among cohorts retiring over the next decade. I use data from the Health and Retirement Study from 1992 to 2004 to estimate the relationship between lifetime earnings, pre-retirement private wealth and Social Security wealth. I show that changes in the lower half of the male earnings distribution explain a substantial portion of changes in the distribution of pre-retirement wealth. Growth in women's earnings across the cohorts does not offset these declines in wealth associated with male earnings. When pensions are added to the measure of wealth, the role of earnings is even larger, reflecting a strong correlation between changes in earnings across these cohorts and changes in the values of their employer-provided pensions. These pension changes do not appear to operate via changes in pension structures (defined benefit versus defined contribution). The present value of wealth from future Social Security benefits, in contrast, grows in real terms throughout most of the distribution. At the bottom of the male distribution of Social Security wealth, reductions in lifetime earnings limit this growth in real benefits, while at the top of the distribution earnings growth amplifies expected growth in Social Security wealth.

Reverse Mortgages: A Closer Look at HECM Loans

by Tonja Bowen Bishop and Hui Shan
SSA Project # NB08-Q2 • Wealth and Retirement Income
National Bureau of Economic Research

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Housing wealth is often the most important wealth component for many elderly homeowners in the United States. Reverse mortgages allow elderly homeowners to consume housing wealth without having to sell or move out of their homes. However, very few eligible homeowners used reverse mortgages to achieve consumption smoothing until recent years when the reverse mortgage market in the U.S. has witnessed substantial growth. This paper examines all Home Equity Conversion Mortgage (HECM) loans that were originated between 1989 and 2007 and insured by the Federal Housing Administration (FHA). We show how characteristics of HECM loans and HECM borrowers have evolved over time, we compare borrowers with non-borrowers, and we analyze loan outcomes using a hazard model. In addition, we conduct numerical simulations on HECM loans that were originated in 2007 to illustrate how the profitability of the FHA insurance program depends on factors such as termination rates, housing price appreciation, and the payment schedule. The analysis performed in this paper serves as the first step to understand the implication of recent growth in the reverse mortgage market. Our results also suggest policy makers who are evaluating the current HECM program should practice caution in predicting future profitability.

The Role of Exponential-Growth Bias and Present Bias in Retirement Savings

by Gopi Shah Goda, Matthew R. Levy, Colleen F. Manchester, Aaron J. Sojourner, and Joshua Tasoff
SSA Project # NB15-04 • Wealth and Retirement Income
National Bureau of Economic Research Working Paper 21482

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There is considerable variation in retirement savings within income, age, and educational categories. Using a broad sample of the U.S. population, we elicit time preference parameters from a quasi-hyperbolic discounting model, and perceptions of exponential growth. We find that present bias (PB), the tendency to value utility in the present over the future in a dynamically inconsistent way, and exponential-growth bias (EGB), the tendency to neglect compounding, are prevalent and distinct latent variables. PB, EGB, and the long-run discount factor are all highly significant in predicting retirement savings, even while controlling for measures of IQ and general financial literacy as well as a rich set of demographic controls. We find that lack of self-awareness of these biases has an additional independent negative impact on retirement savings. We assess potential threats to a causal interpretation of our results with a hypothetical choice experiment and several robustness exercises. Finally, we explore potential mechanisms for our findings. If the relationship we estimate is causal, our estimates suggest that eliminating PB and EGB would be associated with an increase in retirement savings of 12%, or as high as 70% using estimates that account for classical measurement error.

The Shrinking Tax Preference for Pension Savings: An Analysis of Income Tax Changes, 1985–2007

by Gary Burtless and Eric Toder
SSA Project # BC09-12 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2010-3

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The value of the tax preference for pensions depends on the marginal tax schedule and on the tax treatment of income from assets held outside a pension account. We examine the change over time in the value of pension investing, accounting for changes in the tax schedule and in the treatment of equity and bond income. We find that changes in U.S. tax law, especially the treatment of equity income, have led to sizeable changes in the value of the pension tax preference. On balance the value of the pension tax preference to worker-savers is modestly lower than it was in the mid-1980s and substantially lower than it was in the late 1980s.

Tapping Assets in Retirement: Which Assets, How and When?

by James Poterba, Steven Venti, and David A. Wise
SSA Project # NB08-06 • Wealth and Retirement Income
National Bureau of Economic Research

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Just two or three decades ago retirement saving in the United States was based heavily on employer-provided defined benefit plans that provided distributions in the form of lifetime annuities. With the transition to 401(k) and similar programs, the decision about when and how to withdraw retirement resources rests instead with the individual. And to date, assets held in personal retirement accounts have rarely been annuitized. So what are the drawdown patterns for these assets? And how do they relate to the drawdown of other asset categories? Our earlier work focused on the drawdown of home equity in retirement, concluding that home equity is typically not used to support general consumption in retirement, but is instead held as a buffer against shocks, such as the death of a spouse or entry into a nursing home. In this study, similar results are found for 401(k) accounts and for total wealth in all asset categories. Following retirement, the percentage of dollars withdrawn from personal accounts each year appears to fall below the rate of return earned on existing balances, allowing balances to accumulate further. This is true even after people are required to make minimum withdrawals at age 70½ . We find that personal account assets of continuing two-person families tend to increase throughout the age range we consider, through age 85. The retirement assets of continuing one-person families, although much lower than the assets of continuing two-person families, also tend to increase throughout the age range we consider. Personal retirement assets do decline, sometimes precipitously, when two-person families become one-person families through the death of a spouse, divorce, or separation. The overall finding, however, is that in the absence of a major life event, people tend to conserve their assets as they age.

The Taxation of Social Security Benefits as an Approach to Means Testing

by Sarena Goodman and Jeffrey Liebman
SSA Project # NB08-02 • Wealth and Retirement Income
National Bureau of Economic Research

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Many Social Security reform proposals suggest cutting benefits in ways that concentrate the benefit cuts on those most able to bear them. The most common approach adjusts the Social Security benefit formula to reduce replacement rates by a greater amount for those with high levels of lifetime earnings. An alternative approach is to means test Social Security benefits, targeting benefit reductions on those with substantial non-Social Security financial resources. Since 1984, a limited amount of means testing has been accomplished by subjecting a portion of Social Security benefits to the income tax. This paper considers the advantages and disadvantages of means testing as an alternative to progressive benefit formula adjustments and analyzes how close the current taxation of Social Security benefits in the U.S. comes to achieving the potential benefits of means testing. The paper finds that retirement income sources other than Social Security benefits have substantial predictive power for consumption levels in retirement, implying that efforts to target Social Security benefit reductions on those most able to bear them may be more effective if done using information on both Social Security and non- Social Security income sources.

Understanding Inflation-Indexed Bond Markets

by John Y. Campbell, Robert J. Shiller, and Luis M. Viceira
SSA Project # NB09-20 • Wealth and Retirement Income
National Bureau of Economic Research Working Paper 15014

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This paper explores the history of inflation-indexed bond markets in the US and the UK. It documents a massive decline in long-term real interest rates from the 1990s until 2008, followed by a sudden spike in these rates during the financial crisis of 2008. Breakeven inflation rates, calculated from inflation-indexed and nominal government bond yields, stabilized until the fall of 2008, when they showed dramatic declines. The paper asks to what extent short-term real interest rates, bond risks, and liquidity explain the trends before 2008 and the unusual developments in the fall of 2008. Low inflation-indexed yields and high short-term volatility of inflation-indexed bond returns do not invalidate the basic case for these bonds, that they provide a safe asset for long-term investors. Governments should expect inflation-indexed bonds to be a relatively cheap form of debt financing going forward, even though they have offered high returns over the past decade.

The Wealth of Older Americans and the Sub-Prime Debacle

by Barry Bosworth and Rosanna Smart
SSA Project # BC09-07 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2009-21

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This study explores the consequences of the housing price bubble and its collapse for the wealth of older households. We utilize micro survey data to follow the rise in home values to 2007, observing which households enjoyed home price appreciation and how they responded in terms of equity withdrawal. We then use the SCF survey data on wealth holdings from 2007 in combination with national price indexes to simulate the magnitude and distribution of wealth loss from the 2008–9 financial crisis. The collapse of the housing market triggered a broad decline of asset prices that greatly reduced the wealth of all households. While older households mitigated their real estate and equity losses with relatively stable fixed-value assets and pension programs, no demographic group was left unscathed. Prior to the financial crisis, our and other studies had concluded that the current baby-boom cohort of near retirees were surprisingly well-prepared for retirement compared to similarly-aged households over the past quarter century. Unless there is a strong recovery of asset values in the next few years, that favorable assessment is no longer true.

What Good is Wealth Without Health? The Effect of Health on the Marginal Utility of Consumption

by Amy Finkelstein, Erzo F.P. Luttmer, and Matthew J. Notowidigdo
SSA Project # NB08-Q1 • Wealth and Retirement Income
National Bureau of Economic Research Working Paper 14089

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We estimate how the marginal utility of consumption varies with health. To do so, we develop a simple model in which the impact of health on the marginal utility of consumption can be estimated from data on permanent income, health, and utility proxies. We estimate the model using the Health and Retirement Study's panel data on the elderly and near-elderly, and proxy for utility with measures of subjective well-being. We find robust evidence that the marginal utility of consumption declines as health deteriorates. Our central estimate is that a one-standard-deviation increase in the number of chronic diseases is associated with an 11 percent decline in the marginal utility of consumption relative to this marginal utility when the individual has no chronic diseases. The 95 percent confidence interval allows us to reject declines in marginal utility of less than 2 percent or more than 17 percent. Point estimates from a wide range of alternative specifications tend to lie within this confidence interval. We present some simple, illustrative calibration results that suggest that state dependence of the magnitude we estimate can have a substantial effect on important economic problems such as the optimal level of health insurance benefits and the optimal level of life-cycle savings.

Why Don't Retirees Insure Against Long-Term Care Expenses? Evidence from Survey Responses

by Jeffrey R. Brown, Gopi Shah Goda, and Kathleen McGarry
SSA Project # NB11-05 • Wealth and Retirement Income
National Bureau of Economic Research

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We conduct a detailed survey of those nearing and in retirement to help assess the relative support for numerous alternative hypotheses regarding the small size of the long-term care insurance market. We categorize these hypotheses into four broad categories: (i) Preferences and Beliefs, which includes factors such as time preference, risk aversion, bequests, state-dependent utility, and beliefs about the need for care, (ii) Substitutes for Insurance, such as the ability to pay for care out of wealth, home equity, or family resources, a plan to rely on Medicaid, or mistaken beliefs that such care is covered by Medicare, (iii) Substitutes for Formal Care, most notably including the ability to receive care from family members rather than relying on formal market-based care, and (iv) Features of the Private Market, including concerns about cost, affordability, counter-party risk, and distrust of insurers. We find num! erous significant differences in the likelihood of buying insurance based on differences in each of these dimensions. For example, we find that individuals are much more likely to purchase private longterm care insurance if they place a higher value on money when sick versus money when healthy (i.e., state-dependent preferences), if they report a stronger bequest motive, if they believe they are more likely to need care, if they place a stronger emphasis on the avoidance of burdening their families with care provision, prefer care to be given by professionals, and believe premiums are appropriately priced given the care they provide. Individuals are much less likely to purchase private insurance if they believe their family is likely to take care of them, if they are concerned about affordability of insurance, if they are more concerned about counter-party risk, or that they insurance company might deny legitimate claims or raise premiums in the future.

Will Automatic Enrollment Reduce Employer Contributions to 401(k) Plans?

by Mauricio Soto and Barbara A. Butrica
SSA Project # BC09-05 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2009-33

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Many employers match employee contributions to 401(k) plans. However, the employer cost of continuing this practice may increase rapidly as trends towards automatic enrollment boost employee participation. This paper examines the relationship between employer matching behavior and automatic enrollment. Using a sample of large 401(k) plans, we find that match rates are about 7 percentage points lower among firms with automatic enrollment than among those without automatic enrollment, even controlling for firm characteristics. So while autoenrollment increases the number of workers participating in private pensions, our findings suggest it might also reduce the level of pension contributions.

Workers Respond to the Market Crash: Save More, Work More, or Consume Less in Retirement?

by Steven Sass, Courtney Monk, and Kelly Haverstick
SSA Project # BC09-Q2 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2010-15

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This brief is organized as follows. The first section presents details of the CRR survey. The second section discusses the survey's findings on changes in saving and retirement expectations. The third section illustrates one of the many research opportunities the dataset provides by analyzing the effect of enhanced financial literacy on responses to the downturn. The fourth section concludes.

Program Interactions

Capital Income Taxes With Heterogeneous Discount Rates

by Peter Diamond and Johannes Spinnewijn
SSA Project # BC09-13 • Program Interactions
Center for Retirement Research at Boston College Working Paper 2009-14

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With heterogeneity in both skills and preferences for the future, the Atkinson-Stiglitz result that savings should not be taxed with optimal taxation of earnings does not hold. Empirical evidence shows that on average people with higher skills save at higher rates. Saez (2002) suggests that with such positive correlation taxing savings can increase welfare. This paper analyzes this issue in a model with less than perfect correlation between ability and preference for the future. To have multiple types at the same earnings level, the number of types of jobs in the economy is restricted. Key to the analysis is that types who value future consumption less are more tempted to switch to a lower earning job. We show that introducing both a small savings tax on the high earners and a small savings subsidy on the low earners increase welfare, regardless of the correlation between ability and preferences for the future. This can be implemented by earnings varying rules on contributions to tax-favored retirement accounts. However, introducing a uniform savings tax, as in the Nordic dual income tax, increases welfare only if that correlation is succinctly high. There are also some results on optimal taxes that parallel the results on introducing small taxes.

Curing the Dutch Disease: Lessons for the United Disability Policy

by Richard V. Burkhauser, Mary C. Daly, and Philip R. de Jong
SSA Project # UM08-Q2 • Program Interactions
Michigan Retirement Research Center Working Paper 2008-188

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In the 1990s, the United States reformed welfare programs targeted on single mothers and dramatically reduced their benefit receipt while increasing their employment and economic well-being. Despite increasing calls to do the same for working age people with disabilities in the U.S., disability cash transfer program rolls continue to grow as their employment rates fall and their economic well-being stagnates. In contrast to the failure to reform United States disability policy, the Netherlands, once considered to have the most out of control disability program among OECD nations, initiated reforms in 2002 that have dramatically reduced their disability cash transfer rolls, while maintaining a strong but less generous social minimum safety net for all those who do not work. Here we review disability program growth in the United States and the Netherlands, link it to changes in their disability policies and show that while difficult to achieve, fundamental disability reform is possible. We argue that shifts in SSI policies that focus on better integrating working age men and women with disabilities into the work force along the lines of those implemented for single mothers in the 1990s, together with SSDI program changes that better integrate private and public disability insurance programs along the lines of the reforms in the Netherlands, offer the best hope of improving their employment rates and economic well-being as well as reducing SSDI/SSI program growth.

Disability, Earnings, Income and Consumption

by Bruce D. Meyer and Wallace K.C. Mok
SSA Project # NB09-13 • Program Interactions
National Bureau of Economic Research

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Using longitudinal data for the period 1968–2005 for a sample of male household heads, we determine the prevalence of disability during the working years and examine how the extent of disability affects a range of outcomes, including earnings, income, and consumption. We have seven main findings. First, disability rates are high. We divide the disabled along two dimensions based on the persistence and severity of their work-limiting condition. We estimate that a person reaching age 56 has a 53 percent chance of having been disabled at least once during his working years, and a 19 percent chance that he has begun a chronic and severe disability. Second, the economic consequences of disability are frequently profound. Ten years after disability onset, a person with a chronic and severe disability on average experiences a 68 percent decline in earnings, a 32 percent decline in after-tax income, a 22 percent decline in food and housing consumption and a 21 percent decline in food consumption. Third, the various economic consequences differ sharply across disability groups. The outcome declines for those with a chronic and severe disability are often more than twice as large as those for the average disabled. Fourth, our findings show the partial and incomplete roles that individual savings, family support and social insurance play in reducing the consumption drop that follows disability. Only about half of this most disabled group reports receiving Social Security Disability Insurance or Supplemental Security Income. Fifth, we find a noticeable fall in earnings and income prior to the onset of a reported disability. Consumption also falls somewhat, suggesting that future disability is partially but incompletely predictable in the short run. Sixth, time use and detailed consumption data further indicate that disability is associated with a decline in wellbeing. Seventh, the quantities we have estimated, combined with elasticities from the literature, allow us to examine the optimality of current compensation for the disabled. We find that the current compensation for our most disabled group appears to be lower than is optimal.

Does Delay Cause Decay? The Effect of Administrative Decision Time on the Labor Force Participation and Earnings of Disability Applicants

by David Autor, Nicole Maestas, Kathleen Mullen, and Alexander Strand
SSA Project # UM11-01 • Program Interactions
Michigan Retirement Research Center Working Paper 2011-258

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An influential body of research studies the labor supply and earnings of denied Social Security Disability Insurance (SSDI) applicants to estimate the potential employment and earnings of those awarded benefits. This research design implicitly treats employability as a stable applicant attribute that is not directly impacted by the process of applying for SSDI benefits. If, plausibly, applicants' employment potential deteriorates while they are out of the labor force, then the labor force participation of denied applicants—who spend an average of 10 months seeking benefits—may understate their employment potential at the time of application. This paper tests whether the duration of SSDI applications causally affects applicants' subsequent employment. We use a unique Social Security Administration workload database to identify exogenous variation in applicants' initial decision times induced by differences in processing speed among the disability examiners to which they are randomly assigned. This variation significantly affects applicants' total processing time but, importantly, is uncorrelated with their initial award and denial outcomes. We find that longer processing times reduce the employment and earnings of SSDI applicants in the years after their initial decision. A one standard deviation (2.4 month) increase in initial processing time reduces annual employment rates by 1 percentage point (3.2%) in years two, three and four postdecision. Extrapolating these effects to total applicant processing times, we estimate that the SSDI determination process directly reduces the post-application employment of denied applicants by approximately 3.6 percentage points (7%) and allowed applicants by approximately 5.2 percentage points (33%).

Dual-Eligible Medicaid Spending: Are We on the Flat of the Curve?

by Melissa A. Boyle, Joanna N. Lahey, and Margaret E. Czervionke
SSA Project # BC08-15 • Program Interactions
Center for Retirement Research at Boston College Working Paper 2008-16

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For the U.S. Medicare population as a whole, previous studies show that additional medical spending at the margin is ineffective. For the elderly population overall, higher spending on health care does not appear to improve health outcomes or quality of life. The Medicaid literature, however, has shown benefits of increased spending on lower income populations such as single mothers. This suggests that there may be beneficial effects of spending on different segments of the Medicare population, particularly those most at risk—the low-income elderly. We use data from the Medicare Current Beneficiary Survey to examine whether increased medical spending results in differential use of medical services and/or improved health outcomes for low-income elderly who are dually-eligible for Medicare and Medicaid. We utilize state-level variation in Medicaid spending in a difference-in differences framework comparing the dual-eligible population to the near-eligible population just above the means test cutoff to investigate whether additional spending by Medicaid results in differences in health and service use for low-income elderly. Preliminary results suggest that additional spending leads to small increases in drug spending and no other significant increases in utilization or health improvements.

The Effect of Transfer Income on Labor Force Participation and Enrollment in Federal Benefits Programs: Evidence from the Veterans Disability Compensation Program

by David H. Autor and Mark Duggan
SSA Project # NB08-07 • Program Interactions
National Bureau of Economic Research

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The objective of this project is to assess the impact of the Veterans Disability Insurance program (VDC) on Social Security enrollment, including SSI, SSDI and OASI. This topic is relevant to SSA both because VDC has expanded rapidly since 2001 and because further substantial increases in VDC enrollment are expected due to ongoing U.S. military involvement in Iraq and Afghanistan.

The Employment Effects of Social Security Disability Insurance in the Past 25 Years: A Study of Rejected Applicants Using Administrative Data

by Joyce Manchester, Jae Song, and Till von Wachter
SSA Project # NB08-08 • Program Interactions
National Bureau of Economic Research

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We use administrative longitudinal data on earnings, impairment, and mortality to replicate and extend Bound's seminal study of rejected applicants to federal Disability Insurance (DI). We confirm Bound's main result that rejected older male applicants do not exhibit substantial labor force participation. We show this result is stable over time, robust to more narrow control groups, and similar within gender, impairment, industry, and earnings groups. However, we also find that younger rejected applicants have substantial employment after application. To what extent this translates into potential employment for new beneficiaries depends on which group among them is considered "on the margin" of receiving DI. If we use initially rejected applicants—a large and growing fraction of new beneficiaries—the resulting counterfactual employment rate for younger applicants is low, too. We also find that rejected applicants bear signs of economically induced applicants. DI appears to induce a growing number of less successful workers to apply, an important fraction of which ends up without benefits and non-employed.

Health Insurance, Health Care and Labor Supply by Older Adults

by Lauren Hersch Nicholas
SSA Project # UM11-04 • Program Interactions
Michigan Retirement Research Center Working Paper 2011-256

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Early exits from the labor force can adversely affect economic well-being in retirement. Health status and disability are important determinants of retirement age. However, it is unknown whether more intensive healthcare utilization can effectively delay or reverse the onset of work-limiting disability. This paper examines the effect of elective surgery receipt on Social Security Disability Insurance application and receipt and the age at which Social Security benefits are first claimed amongst older adults with arthritis and heart disease, common chronic conditions amongst older adults. I use panel data from the Health and Retirement Study to follow older adults with work-limiting disabilities who develop new chronic conditions. Comparisons of patients who do and do not receive elective surgery suggest that both angioplasty and joint replacement surgery reduce the probability of applying for Social Security Disability Insurance by up to 22 percentage points and delay the age at which a respondent first claims Social Security benefits by 1.3–3.5 years. Periods of uninsurance after condition onset are associated with lower probability of receiving surgery for patients with heart disease, but not arthritis. Increasing access to medical care amongst chronically ill workers may help to reduce new SSDI applications. Temporary benefit programs to provide income support to workers taking medical leave to receive surgery, for example, could help to reduce permanent transitions to SSDI. Findings also suggest that there are important economic effects of medical treatment intensity that should be considered in cost-effectiveness analysis.

The Impact of Temporary Assistance Programs on Disability Rolls and Re-Employment

by Stephen Lindner and Austin Nichols
SSA Project # BC11-15 • Program Interactions
Center for Retirement Research at Boston College Working Paper 2012-2

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Workers who lose their job draw from temporary assistance programs in order to buffer their income losses. They are also more likely to apply for Disability Insurance (DI) and Supplemental Security Income (SSI). Whether participating in temporary assistance programs influences the application decision for DI and SSI, however, is largely unknown. We address this question using panels from the Survey of Income and Program Participation matched to administrative records on DI and SSI applications. We distinguish between four temporary insurance programs: Temporary Assistance for Needy Families (TANF), Supplemental Nutrition Assistance Program (SNAP), Unemployment Insurance (UI), and Temporary Disability Insurance programs (TDI). For each of these programs, we construct instruments based on state policies in order to address endogeneity concerns. Our results indicate that workers select into temporary assistance and disability programs by income and health status. When controlling for selection bias, we find evidence that increased access to UI benefits reduces applications for DI, while increased access to SNAP benefits increases applications for SSI. These results suggests that (1) applications for DI and SSI are sensitive to participation in temporary assistance programs, (2) the strength of the net effect depends on the overlap between target populations, and (3) the direction of the net effect depends on benefit levels or on institutional and population characteristics.

The Impact of Unemployment Insurance Extensions on Disability Insurance Application and Allowance Rates

by Matthew S. Rutledge
SSA Project # BC11-14 • Program Interactions
Center for Retirement Research at Boston College Working Paper 2011-17

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Both unemployment insurance (UI) extensions and the availability of disability benefits have disincentive effects on job search. But UI extensions can reduce the efficiency cost of disability benefits if UI recipients delay disability application until exhausting their unemployment benefits. This paper investigates whether UI eligibility, extension, and exhaustion affect the timing of disability application and the composition of the applicant pool. Jobless individuals are significantly less likely to apply to Social Security Disability Insurance (SSDI) during UI extensions, and significantly more likely to apply when UI is ultimately exhausted. Healthier potential applicants appear more likely to delay, as state allowance rates increase after a new UI extension. Though simulations find that extensions do not decrease SSDI costs, the benefits of UI extensions still may be understated—permanent disability benefits are diverted to shorter-run unemployment benefits and, potentially, new jobs, while easing the burden on the nearly-insolvent SSDI Trust Fund.

The Implications of Declining Retiree Health Insurance

by Courtney Monk and Alicia H. Munnell
SSA Project # BC09-16 • Program Interactions
Center for Retirement Research at Boston College Working Paper 2009-15

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A large number of retirees have employer-sponsored retiree health insurance (RHI). While RHI is a common source of supplemental coverage for Medicare beneficiaries, it is also the only affordable source of health insurance for many retirees under age 65 who have no access to Medicare. However, employers are scaling back their RHI benefits in response to rising health costs and changes in accounting rules, by either eliminating benefits which shifts costs to retirees, or tightening vesting requirements. Using data from the Health and Retirement Study, this paper examines the potential consequences of eliminating RHI for both pre-Medicare and Medicare-eligible retirees. For younger retirees the likely primary response is to work longer, and we find that number of workers age 55 to 64 would increase by 7 percent, as some of those who have their access to RHI eliminated would work rather than retire. Of those who still choose to retire, most lack any employer-sponsored health insurance option and would need to find an alternative source of coverage or go uninsured. For Medicare beneficiaries over 65, we estimate that about three quarters would replace RHI with another form of supplemental coverage. This shift would slightly reduce total spending and utilization for individuals who choose basic Medicare or a Medicare HMO as opposed to a Medigap plan, but health outcomes would probably be unaffected no matter which supplemental option is chosen. In short, a full elimination of RHI would primarily impact early retirees who must face the cost of much more expensive insurance or of financing illness without insurance. Policymakers may want to consider encouraging insurers to step in to provide more affordable plans for these early pre-Medicare retirees.

The Importance of State Anti-Discrimination Laws on Employer Accommodation and the Movement of their Employees onto Social Security Disability Insurance

by Richard V. Burkhauser, Lauren H. Nicholas, and Maximilian D. Schmeiser
SSA Project # UM11-02 • Program Interactions
Michigan Retirement Research Center Working Paper 2011-251

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The rate of application for Social Security Disability Insurance (SSDI) benefits, as well as the number of beneficiaries has been increasing for the past several decades, threatening the solvency of the SSDI program. One possible remedy is to promote continued employment amongst those experiencing the onset of a work limiting disability through the provision of workplace accommodations. Using the Health and Retirement Study data linked to Social Security administrative records and a state fixed effects model, we find that the provision of workplace accommodation reduces the probability of application for SSDI following disability onset. We estimate that receipt of an accommodation reduces a worker's probability of applying for SSDI by 30 percent over five years and 21 percent over 10 years. We then attempt to control for the potential endogeneity of accommodation receipt by exploiting exogenous variation in the implementation of state and federal anti-discrimination laws to estimate the impact of workplace accommodation on SSDI application in an instrumental variables (IV) model. While our coefficients continue to indicate that accommodation reduces SSDI application, we obtain implausibly large estimates of this effect. Overall our results imply that increasing accommodation is a plausible strategy for reducing SSDI applications and the number of beneficiaries.

Income, Material Hardship, and the Use of Public Programs among the Elderly

by Helen Levy
SSA Project # UM09-14 • Program Interactions
Michigan Retirement Research Center Working Paper 2009-208

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I use data from the 2006 Health and Retirement Study to analyze the determinants of material hardship among individuals ages 65 and older. Ten percent of the elderly report hardship—defined here as cutting back on food or medications because of cost—in 2006. Although hardship is more likely for poorer individuals and, to some extent, for recipients of public transfer programs (Medicaid, Food Stamps, and/or Supplemental Security Income), the majority of those experiencing hardship are not poor and do not participate in these programs. In multivariate models, I find that self-reported health and activity limitations are significant predictors of hardship.

The Investment Behavior of State Pension Plans

by Jeffrey R. Brown, Joshua Pollet, and Scott J. Weisbenner
SSA Project # NB09-12 • Program Interactions
National Bureau of Economic Research

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This paper provides evidence on the investment behavior of 20 state pension plans that actively manage their own equity portfolios. We find that while these states tend to hold a diversified portfolio that approximates the overall market, they nonetheless substantially overweight the holdings of stocks of companies that are headquartered in-state. The extent of this over-weighting of within-state stocks by state pension plans is three times larger than that of other institutional investors. We explore three possible reasons for this in-state bias, including familiarity bias, information-based investing, and non-financial/political considerations. State boundaries are important for predicting state pension plan holdings—while there is a significant preference for instate stocks, there is no similar tilt toward holding stocks from neighboring stocks. We find evidence that states are able to generate excess returns through their in-state investment activities, particularly among smaller stocks in the primary industry in the state. However, we also find evidence that is at least suggestive of political influence playing a role in the stock selection process, as state pension plans of corrupt states are more likely to hold within state stocks. The difference in performance between within-state and out-of-state stock investments is strongest for the state pension plans located in more corrupt states.

Labor Supply Effects of the Interaction between the Social Security Disability and Retirement Programs at Full Retirement Age

by Nicole Maestas and Na Yin
SSA Project # UM08-13 • Program Interactions
Michigan Retirement Research Center Working Paper 2008-194

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The Social Security DI program has long been thought to impose a strong work disincentive. Nevertheless, its causal effect on labor supply has been difficult to estimate. We take a new look at this question by exploiting the fact that DI benefits are payable only until full retirement age (FRA), at which point they are converted to retired worker benefits, and the implicit greater-than-100 percent tax rate on earnings is abruptly relaxed. Using a quasi-experimental research design, we examine whether the DI work disincentives are binding by comparing changes in labor force participation rates before and after the FRA for DI beneficiaries versus non-beneficiaries. We find a relative increase in labor force participation at FRA for DI beneficiaries of 7 percentage points, and argue that this is likely a lower bound on the latent work capacity of DI recipients.

The Long-Term Financial and Health Outcomes of Disability Insurance Applicants

by Kathleen McGarry and Jonathan Skinner
SSA Project # NB09-07 • Program Interactions
National Bureau of Economic Research

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In this study, we quantify the long-term financial and health circumstances of those receiving SSDI or SSI benefits, and of those who applied to these programs, but were rejected. We compare their economic and health outcomes to people who never applied to these programs. Our exploratory results suggest dramatically lower levels of income and wealth among those receiving SSDI and SSI, even when controlling for differences in socioeconomic status and self-reported health. As has been found in other studies, mortality rates are higher among this group compared to those who never applied, and self-reported health is much worse. Perhaps more surprisingly, those who applied for SSDI/SSI, but who were rejected, experienced nearly identical adverse effects as those who received benefits. Indeed for some measures (such as income and wealth pre-retirement), rejected applicants were worse off than the SSDI/SSI recipients. For people over age 65, there was nearly complete convergence between those who received benefits and those who simply applied but never got benefits—they all experienced much lower levels of income and wealth that could not apparently be explained by education, race, ethnicity, or self-reported health. Whether these adverse effects reflect selection into the process of just applying for SSDI or SSI, or whether there are causal adverse effects of these programs are not entirely clear.

Medicare Part D and the Financial Protection of the Elderly

by Gary V. Engelhardt and Jonathan Gruber
SSA Project # BC09-10 • Program Interactions
Center for Retirement Research at Boston College Working Paper 2009-24

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We examine the impact of the expansion of public prescription drug insurance coverage from Medicare Part D on the elderly and find evidence of substantial crowd-out. Using detailed data from the 2002-6 waves of the Medical Expenditure Panel Survey (MEPS), we estimate that the extension of Part D benefits resulted in 75% crowd-out of prescription drug insurance coverage and 33%-50% crowd-out of prescription drug expenditures of those 65 and older. Part D is associated with relatively small reductions in out-of-pocket spending. This suggests that the welfare gain from protecting the elderly from out-of-pocket spending risk through Part D has been small.

Prescription Drug Insurance Coverage, Drug Utilization, and Cost-Related Non-Adherence: Evidence from the Medicare Part D Expansion

by Gary V. Engelhardt
SSA Project # BC11-16 • Program Interactions
Center for Retirement Research at Boston College Working Paper 2011-19

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This paper uses the substantial increase in prescription drug insurance coverage from the adoption of Part D to generate new estimates the impact of coverage on drug utilization and cost-related non-adherence. The analysis uses detailed panel data on the elderly before and after the implementation of Part D drawn from the 2005 and 2007 Prescription Drug Study (PDS), administered as a supplement to the Health and Retirement Study (HRS), a large nationally representative survey of Americans aged 50 and older. Fixed effect estimates suggest that gaining coverage results in a 15% increase in utilization. These results are consistent with the lower end of estimates in the literature. Gaining coverage also is associated with a 20–50% reduction in the incidence of cost-related nonadherence. However, even among the uninsured, only a relatively small proportion of drugs (12%) are associated with episodes of cost-related non-adherence. So, these large reductions apply to a small slice of all drugs.

Public Long-Term Care Insurance and the Housing and Living Arrangements of the Elderly: Evidence from Medicare Home Health Benefits

by Gary V. Engelhardt and Nadia Greenhalgh-Stanley
SSA Project # BC08-05 • Program Interactions
Center for Retirement Research at Boston College Working Paper 2008-15

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We provide empirical evidence on the extent to which long-term care insurance affects the housing and living arrangements of the elderly by examining plausibly exogenous changes in the supply of long-term care insurance through the Medicare program that occurred in the late 1990s. Prior to 1997, Medicare reimbursed home health care agencies on a retrospective-cost basis. Then, starting in October, 1997, as a result of the Balanced Budget Act of 1997 (BBA97), Medicare switched to a system of prospective payments for home health care, which induced state-by-calendar-year variation in the supply of this type of public long-term care insurance. We exploit this variation to econometrically identify the impact on the housing and living arrangements of the elderly, using CPS data from 1995-2000 (before and after the law change). Our estimates indicate that living arrangements are quite responsive to home health care benefits. The estimated elasticity of shared living to benefits is -0.7 over all elderly and -1 for widowed elderly. However, these benefits have little impact on household headship among the elderly. This suggests that the bulk of the shared-living response occurred through co-residents living in elderly households. There is some weak evidence that increases in benefits raised elderly homeownership.

Selection on Moral Hazard in Health Insurance

by Liran Einav, Amy Finkelstein, Stephen Ryan, Paul Schrimpf, and Mark Culleny
SSA Project # NB11-10 • Program Interactions
National Bureau of Economic Research

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In this paper we explore the possibility that individuals may select insurance coverage in part based on their anticipated behavioral response to the insurance contract. Such selection on moral hazard ?can have important implications for attempts to combat either selection or moral hazard. We explore these issues using individual-level panel data from a single firm, which contain information about health insurance options, choices, and subsequent claims. To identify the behavioral response to health insurance coverage and the heterogeneity in it, we take advantage of a change in the health insurance options offered to some, but not all of the firm's employees. We begin with descriptive evidence that is suggestive of both heterogeneous moral hazard as well as selection on it, with individuals who select more coverage also appearing to exhibit greater behavioral response to that coverage. To formalize this analysis and explore its implications, we develop and estimate a model of plan choice and medical utilization. The results from the modeling exercise echo the descriptive evidence, and allow for further explorations of the interaction between selection and moral hazard. For example, one implication of our estimates is that abstracting from selection on moral hazard could lead one to substantially over-estimate the spending reduction associated with introducing a high deductible health insurance option.

Stylized Facts and Incentive Effects Related to Claiming of Retirement Benefits Based on Social Security Administration Data

by Wojciech Kopczuk and Jae Song
SSA Project # UM08-04 • Program Interactions
Michigan Retirement Research Center Working Paper 2008-200

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We rely on the Master Beneficiary File to document a number of facts regarding claiming of Social Security benefits and quality of date of birth data in administrative files. We then assess the impact of changes in retirement incentives that have taken place since 2000 on claiming. We find evidence of non-trivial misreporting or clerical errors in the dates of births that give rise to systematic patterns but nevertheless appear to be fairly random. We also confirm significant tendency to claim in January or on birthdays, but we find that these patterns are still sensitive to incentive effects. Relying on the discontinuity in the Early Entitlement Age that occurs for people born on the second day of any month, we find evidence that people do not have singlepeaked preferences over claiming age: relaxing the early retirement constraint leads to acceleration of retirement by some people for whom the constraint would not be otherwise binding. One possible explanation for this pattern is a preference for retiring at one's birthday. We take advantage of a change in the full retirement age and find that there remains unusually large (relative to other birthdays) number of people who claim around their 65th birthday, supporting the idea that Medicare eligibility has an impact on claiming retirement benefits. Finally, we confirm that elimination of the earnings test in 2000 for those above full retirement age accelerated retirements and find that it also led to a significant weakening of the January effect in that group, bolstering the idea that the January effect is sensitive to economic incentives.

Taxes and Pensions

by Peter Diamond
SSA Project # BC09-13 • Program Interactions
Center for Retirement Research at Boston College Working Paper 2009-12

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Pension benefit rules depend on individual history far more than taxes do, and age plays a much larger role in pension determination than in tax determination. Apart from some simulation studies, theoretical studies of optimal tax design typically contain neither a mandatory pension system nor the behavioral dimensions that lie behind justifications commonly offered for mandatory pensions. Conversely, optimizing models of pension design typically do not include annual taxation of labor and capital incomes. After spelling out this contrast and reviewing (and rejecting) zero taxation of capital income based on the Atkinson-Stiglitz and Chamley-Judd results, this article raises the issue of tax-favored retirement savings, a topic where the two subjects come together.

The Transformation in Who is Expected to Work in the United States and How it Changed the Lives of Single Mothers and People with Disabilities

by Richard V. Burkhauser, Mary C. Daly, Jeff Larrimore, and Joyce Kwok
SSA Project # UM08-Q2 • Program Interactions
Michigan Retirement Research Center Working Paper 2008-187

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In the 1990s, social expectations of single mothers shifted towards the notion that most should, could, and would work, if given the proper incentives. This shift in expectations culminated in the passage of the Personal Responsibility and Work Opportunity Reconciliation Act in 1996, commonly known as welfare reform. As a result, ADFC/TANF caseloads fell along with cash transfers to single mothers who did not work. A decade later the earnings and household income of single mothers are significantly higher and moving more in synch with the U.S. economy. In stark contrast and despite espoused goals to the contrary, public policies toward working age men and women with disabilities have remained imbued with the notion that most cannot and thus, would not work, no matter what incentives they faced. As a result, SSDI/SSI expenditures and caseloads have increased and the earnings and household income of working age men and women with disabilities have fallen, leaving them even further behind the average working age American than they were a decade ago. Using data from the Current Population Survey we follow the economic well-being and employment of single mothers and working age men and women with disabilities over the past two major United States business cycles (1982–1993 and 1993–2004) and show that despite the dramatic decline in ADFC/TANF funding, single mothers' economic well-being, labor earnings and employment all have risen substantially. In contrast, despite the dramatic increase in SSDI/SSI funding, the economic wellbeing of working age men and women with disabilities remained stagnant, as their labor earnings and employment plummeted.

The Under-Reporting of Transfers in Household Surveys: Its Nature and Consequences

by Bruce D. Meyer, Wallace K.C. Mok, and James X. Sullivan
SSA Project # NB08-12 • Program Interactions
National Bureau of Economic Research

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Benefit receipt in major household surveys is often under-reported. In recent years, as many as half of the dollars received through Food Stamps, Temporary Assistance for Needy Families (TANF) and Workers' Compensation has not been reported in the Current Population Survey (CPS). High rates of understatement are found for many other government transfer programs and in datasets such as the Survey of Income and Program Participation (SIPP) and the Panel Study of Income Dynamics (PSID). These datasets are among our most important for analyzing incomes and their distribution as well as transfer receipt. Thus, this understatement has major implications for our understanding of the economic circumstances of the population and the working of government programs. We provide estimates of the extent of transfer underreporting for the main transfer programs and the major nationally representative household surveys. We obtain estimates by comparing weighted totals reported by households for these programs with those published by government agencies. Our results show sharp differences across programs and surveys as well as over time. These differences are informative as to the relative importance of the various reasons for under-reporting. The estimates indicate the magnitude of bias in existing estimates and can also be used to adjust estimated program effects on incomes and estimates of program take-up.

What Explains State Variation in SSDI Application Rates?

by Norma B. Coe, Kelly Haverstick, Alicia H. Munnell, and Anthony Webb
SSA Project # BC11-12 • Program Interactions
Center for Retirement Research at Boston College Working Paper 2011-23

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Social Security Disability Insurance (SSDI) applications and receipts vary greatly by state. This paper investigates the extent to which this geographic variation in SSDI applications reflects differences in health, demographics, and employment characteristics, state policies,, and politics. We find that demographic, health, and employment characteristics of the state have the greatest effect on state-level variations in SSDI application rates, explaining over 70 percent of the variation. State policy concerning mandated employer-sponsored disability insurance (also known as temporary disability insurance or TDI) has a small negative effect on overall SSDI applications. This finding supports the principle underlying many recent SSDI reform plans: temporary disability insurance coverage could save the SSDI program considerable funds in the long-run. Further, when we look to explain variation within a state, we find that state changes in health insurance regulation are negatively correlated with the SSDI application rate. This could be an indication that the Affordable Care Act (ACA) may have spillovers to the SSDI program.

Work Ability and the Social Insurance Safety Net in the Years Prior to Retirement

by Richard W. Johnson, Melissa M. Favreault, and Corina Mommaerts
SSA Project # BC09-15 • Program Interactions
Center for Retirement Research at Boston College Working Paper 2009-28

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A patchwork of public programs—primarily Social Security Disability Insurance, workers' compensation, Supplemental Security Income, and veterans' benefits—provides income supports to people who are unable to work. Yet, questions persist about the effectiveness of these programs. This report examines the economic consequences of disability in the years leading to retirement. Using data from the Health and Retirement Study, we follow a sample of Americans age 51 to 55 in 1992 until age 64, just before qualifying for full Social Security retirement benefits, and observe their disability status, disability benefit receipt, and income every other year. Our multidimensional disability measure combines information from multiple questions about self-assessed work disability, overall health status, limitations with activities of daily living, functional impairments, and depression.
The results underscore the precarious financial state of most people approaching traditional retirement age with disabilities. Disability rates roughly double as people age from 55 to 64. Fewer than half of people who meet our disability criteria ever receive disability benefits in their fifties or early sixties. Benefit receipt rates are much higher among those with the most severe disabilities, suggesting that benefits are targeted to those least able to work, but women are less likely than men to receive benefits, even when models control for disability severity. Poverty rates for people who collect disability benefits in their fifties and early sixties are more than three times as high after benefit receipt than before disability onset.

International Research

Active vs. Passive Decisions and Crowd-Out in Retirement Savings Accounts: Evidence from Denmark

by Raj Chetty, John N. Friedman, Soren Leth-Petersen, and Torben Nielsen
SSA Project # NB12-04 • International Research
National Bureau of Economic Research

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Do retirement savings policies (such as tax subsidies or employer-provided pension plans) increase total saving for retirement or simply induce shifting across accounts? We revisit this classic question using a panel dataset with 50 million observations on savings for the population of Denmark. We find that a policy's impact on total savings depends critically on whether it changes savings rates by active or passive choice. Policies such as tax subsidies that rely upon individuals to take an action to raise savings have small impacts on total wealth. In contrast, policies that raise savings automatically even if individuals take no action (such as employer-provided pensions or automatic contributions to retirement accounts) increase wealth accumulation substantially. Intuitively, price subsidies only affect the behavior of active savers who optimize their portfolios with respect to policy, whereas automatic contributions increase savings of passive individuals who do not reoptimize. We estimate that approximately 85% of individuals are passive savers. The 15% of active savers who respond to price subsidies do so by reallocating savings across accounts. Overall, our results imply that automatic contributions may be more effective at increasing total retirement savings than price subsidies for two reasons: (1) subsidies induce relatively few individuals to respond, and (2) they generate substantial crowdout conditional on response.

The Cost of Owning Employer Stocks: Lessons From Taiwan

by Yi-Tsung Lee, Yu-Jane Liu, and Ning Zhu
SSA Project # BC06-S5 • International Research
Center for Retirement Research at Boston College Working Paper 2007-24

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Using data on all employees at listed companies in Taiwan, we find that the bias toward employer stocks is generic to individual investor decision-making, but not limited to retirement plans. 71 percent of sample employees invest in employer stocks and the employer stocks make up on average 47 percent of employee equity portfolios. The under-diversification resulting from the bias toward employer stocks is highly costly. Holding current portfolio risk constant, employees forego 4.89 percent per annum in raw returns by investing in employer stocks, which represents 39.74 percent of their average 1998 salary income. Our findings have important implications for social security reform and retirement account management.

Cross-National Comparison of Income and Wealth Status in Retirement: First Results from the Luxembourg Wealth Study (LWS)

by Eva Sierminska, Timothy Smeeding, and Andrea Brandolini
SSA Project # BC06-15 • International Research
Center for Retirement Research at Boston College Working Paper 2007-03

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In this paper, we assess the role of income and wealth in comparing economic security of older persons in the United States in cross-national perspective. We compare our elders to those in six other rich OECD countries (Canada, Finland, Germany, Italy, Sweden, and the United Kingdom). These countries have diverse social policy systems, with respect to both social insurance and public assistance; and they have very different patterns of private wealth holding. The paper is based on a new source of wealth micro data, known as the Luxembourg Wealth Study (LWS). In this paper, we first develop a comparable definition of wealth and net worth across nations and then focus our efforts on the inter-country variation in the composition of income and asset packages for those 65 and over, with respect to the main sources in each package. We examine the structure of income and wealth holdings and their joint distribution; how the poor fare; how assets vary by education; and the importance of home owning to elders in almost every nation. We conclude by comparing the risks associated with private assets to those associated with under-funded public pension systems.

Crowd-out, Adverse Selection and Information in Annuity Markets: Evidence from a New Retrospective Data Set in Chile

by Alejandra Cox Edwards and Estelle James
SSA Project # UM06-19 • International Research
Michigan Retirement Research Center Working Paper 2006-147

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Annuitization is often considered a socially desirable payout mode from pension plans, because it provides a lifelong income stream and therefore ensures that retirees will not run out of money. However, annuitization is rare in most countries. This project examines workers' choices during the payout stage in Chile, the only country that has had mandatory personal accounts long enough to have had substantial experience with payouts. Upon retirement, workers in Chile have limited options for payouts: they must either annuitize or take gradual withdrawal. Two-thirds have annuitized. We expect that retirees are less likely to annuitize if their accumulation finances a pension in the vicinity of the minimum pension, whose value is guaranteed by the state. In that case, publicly financed longevity insurance is likely to crowd out private annuity insurance. We expect that retirees with health problems are also less likely to annuitize, possibly leading to adverse selection. Finally, we expect that individuals with greater risk aversion, smaller time preference and better knowledge about the system are more likely to annuitize. A new retrospective data set from Chile yields evidence that is broadly consistent with these hypotheses.

The Displacement Effect of Public Pensions on the Accumulation of Financial Assets

by Michael Hurd, Pierre-Carl Michaud and Susann Rohwedder
SSA Project # UM09-16 • International Research
Michigan Retirement Research Center Working Paper 2009-212

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The generosity of public pensions may depress private savings and provide incentives to retire early. While there is plenty of evidence supporting the latter effect, there remains considerable controversy as whether or not public pensions crowd out private savings. This paper uses international micro-datasets collected over recent years to investigate whether public pensions displace private savings. The identification strategy relies on differences in the progressivity or non-linearity of pension formulas across countries. We also make use of large heterogeneity in earnings across education group and country. The evidence we present is consistent with previous studies using cross-sectional and time-series variation in savings and pensions. We estimate that an extra dollar of pension wealth depresses accumulated financial assets at the time of retirement by 23 to 44 cents and that an extra ten thousand dollars in pension wealth reduces the average retirement age by roughly 1 month.

Economic Restructuring and Retirement in Urban China

by John Giles
SSA Project # BC06-S2 • International Research
Center for Retirement Research at Boston College Working Paper 2008-24

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In its gradual approach to economic transition, China deferred the difficult process of restructuring state owned enterprises (SOEs) until the mid-1990s. When restructuring of large scale SOEs accelerated after 1997, China witnessed sharp declines in the employment of urban residents. While some dislocated state sector workers made a transition to work in the non-state sector, large shares of laid off workers spent long periods unemployed or out of the labor force. Much of the transition out of the state sector occurred through early retirement and exit from the labor force of older workers. While earlier work suggested that the sharp decrease in labor force participation of older women is driven by reappearance of discrimination in the labor market, analysis of reemployment decisions suggests that exit from the labor force reflects a choice. Women exited the labor force in great numbers after 1996, but women with adult children of college age are 60 percent more likely than other women to be re-employed within a year. We also find weak evidence that women who provide care for elderly family members are less likely to be employed. An increase in the labor supply of older women after 2004, however, suggests that the exit of older women from the labor force between 1996 and 2002 was driven primarily by generous early retirement pensions offered during the process of restructuring.

Fettered Consumers and Information Mandates: Evidence from Mexico's Privatized Social Security Market

by Fabian Duarte and Justine Hastings
SSA Project # NB09-04 • International Research
National Bureau of Economic Research

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This study analyzes data on investment decisions and personal account management in Mexico's privatized social security system. In this system, workers freely allocate their savings between the investment options of 15–20 approved fund managers. A key finding is that management fees play little role in workers' investment decisions. Also, workers switch fund managers infrequently, despite frequent changes in the relative expense of the different fund managers. Demand for different investment managers is price inelastic for workers from most income and educational backgrounds. For low-income workers, peer and employer effects, advertising exposure and brand name are larger determinants of fund manager choice than management fees. Higher-income and higher-educated workers are more likely to chase past returns. Changes in employment are the single largest determinant of when workers switch fund managers.

First-Round Impacts of the 2008 Chilean Pension System Reform

by Jere R. Behrman, Maria Cecilia Calderon, Olivia S. Mitchell, Javiera Vasquez, and David Bravo
SSA Project # UM11-05 • International Research
Michigan Retirement Research Center Working Paper 2011-245

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Chile's innovative privatized pension system has been lauded as possible model for Social Security system overhauls in other countries, yet it has also been critiqued for not including a strong safety net for the uncovered sector. In response, the Bachelet government in 2008 implemented reforms to rectify this shortcoming. Here we offer the first systematic effort to directly evaluate the reform?s impacts, focusing on the new Basic Solidarity Pension for poor households with at least one person age 65+. Using the Social Protection Survey, we show that targeted poor households received about 2.4 percent more household annual income, with little evidence of crowding-out of private transfers. We also suggest that recipient household welfare probably increased due to slightly higher expenditures on basic consumption including healthcare, more leisure hours, and improved self-reported health. While measured short-run effects are small, follow-ups will be essential to gauge longer-run outcomes.

Growth in Health Consumption and its Implications for Financing OASDI: An International Perspective

by Barry P. Bosworth and Gary Burtless
SSA Project # BC12-08 • International Research
Center for Retirement Research at Boston College Working Paper 2012-21

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The rising cost of U.S. health care has reduced the share of compensation that is taxable by Social Security. Between 1960 and 2010 non-taxable employer premiums for worker health plans increased from 1 percent to 7 percent of employee compensation. We use international data to examine the determinants of trends in health care spending and the reasons that the U.S. experience has differed from that of other high-income countries. In 2010 the share of U.S. GDP devoted to health care was 7.2 percentage points higher than the share in other rich countries. We document the growth of this gap in the past 5 decades. Much of it developed between 1980 and the mid-1990s, though we also find another episode of out-size growth in the early 2000s. We identify six countries, including most of Scandinavia, that have seen a slowdown in health spending growth. These were also countries that had higher-than-expected health spendin! g, given their average incomes, in the 1960s and 1970s. The slowdown in their health expenditure growth may simply reflect a reversion of their spending toward the OECD mean. We find no mean reversion in U.S. health spending growth. Our review of other literature suggests that the current excess in U.S. health costs is mainly traceable to higher prices for health care goods and services. Compared with other OECD countries, the U.S. has been slow to develop institutions or global budget constraints that restrain the pace of health cost growth.

How Pension Rules Affect Work and Contribution Patterns: A Behavioral Model of the Chilean Privatized Pension System

by Petra Todd and Viviana Vélez-Grajales
SSA Project # UM08-22 • International Research
Michigan Retirement Research Center Working Paper 2008-193

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Chile has been at the forefront of pension reform, having switched in 1980 from a pay-as-you-go system to a fully funded privatized accounts system. The Chilean system served as a model for reform in many other Latin American countries and has also been considered by U.S. policy makers as a possible prototype for social security reform. One of the criticisms of the Chilean system is low coverage rates and contributions rates among certain segments of the population. In January 2008, the Chilean Congress passed several reforms aimed at increasing coverage and contribution rates and expanding the safety net provided by the system to poor households. This study evaluates how changes in pension system rules affect working behavior and pension contribution patterns using data from a new Chilean household survey administered in 2002 and 2004 linked with administrative data from the pension regulatory agency. It develops and estimates a dynamic model of decision-making about working in the covered or uncovered sectors of the economy and studies implications of changes in the pension system rules for pension accumulations. We find that working decisions of people age 18–40 are sensitive to changes in the number of years required to get a minimum pension and to changes in the level of minimum pension but are relatively insensitive to the level of fees charged by the pension system. Decreasing the requirements for a minimum pension or increasing the level of the minimum pension increases work in the covered labor market sector.

The Impact of Private Participation on Disability Costs: Evidence from Chile

by Estelle James, Alejandra Cox Edwards, and Augusto Iglesias Palau
SSA Project # UM07-14 • International Research
Michigan Retirement Research Center Working Paper 2007-161

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Social security systems in many countries face problems of high and escalating disability costs. This paper analyzes how disability costs have been controlled in Chile. The disability insurance system in Chile is much less well-known than the pension part, but it is equally innovative. It differs from traditional public disability insurance in two important ways: 1) it is largely pre-funded, sufficient to cover a lifetime disability annuity and 2) the disability assessment procedure includes participation by private pension funds (AFPs) and insurance companies, who finance the benefit and have a direct pecuniary interest in controlling costs. We hypothesize that these procedures and incentives will keep system costs low, by cutting the incidence of successful disability claims. Using the Cox proportional hazard model based on a retrospective sample of new and old system affiliates (ESP 2002), we conclude that observed behavior is broadly consistent with this hypothesis. Disability hazard rates are only 20–35 percent as high in the new system as in the old, after controlling for other co-variates. Furthermore, analysis of mortality rates among disabled pensioners (using probit and proportional hazard models) suggests that the new system has accurately targeted those with more severe medical problems.

The Impact of Risk and the Financial Crisis on Perceptions of Privatized Social Security and Retirement Planning

by James Choi, Justine Hastings, and Unika Shrestha
SSA Project # NB12-07 • International Research
National Bureau of Economic Research

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How do investors from broad backgrounds understand investment risk? How does exposure to negative shocks impact their valuation of risk, their valuation of social security, and their retirement knowledge and planning? We use a new household survey in Mexico's privatized social security system linked to administrative records form the privatized Mexican Social Security System to examine these questions. Using policy-induced exogenous shocks to investment returns around the financial crisis and a representative 7,800 person household survey data set linked to administrative data we will estimate how negative returns to social security accounts affect knowledge of social security system rules, risk preferences, value of the social security account and plans for retirement. We find some evidence that low or negative returns cause increased financial knowledge among men, and that high returns increase reliance on and value of the retirement account and financial instruments more generally among women. Our results contribute new insights into how individuals understand and learn about investment risk and plan for retirement with personal ownership over retirement accounts.

Incomes in the Transition to Retirement: Evidence from Canada

by Kevin Milligan
SSA Project # NB10-09 • International Research
National Bureau of Economic Research

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Countries around the world are considering an increase to retirement ages in response to fiscal and demographic pressure on social security systems. However, concern may arise about the impact of such reforms on those who retire before the age of full social security entitlement. This paper addresses the question of how those stopping work before the age of benefit entitlement source their incomes and the extent to which they are able to avoid economic hardship. To do so, I study panels of Canadian men between 1993 and 2008 drawn from the Survey of Labour and Income Dynamics. The data allow a very detailed composition of income by source using a high quality income survey with annual information. These data are employed to make a novel calculation—determining the contribution of various supplemental income sources to lifting those not working at older ages out of a position of hardship. I find that demographic, health, and job characteristics are not very predictive of early retirement, and that those who retire early before the age of public pension entitlement are a very diverse group. Over half of the early retiring men I study who initially seem to suffer hardship before benefit entitlement are lifted out of hardship when other resources are accounted for.

Intergenerational Risk Sharing and the Effects of Social Security Reforms

by Lee Lockwood and Day Manoli
SSA Project # NB12-17 • International Research
National Bureau of Economic Research

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With increasing pressure for social security reform in many countries, it is important to understand the extent to which families share risk across generations in an effort to offset the effects social security reforms. In particular, understanding the degree of this intergenerational risk sharing is critical for evaluating the distributional consequences of potential social security reforms that reduce benefits of future retirees. We address this topic using data from the Bank of Italy's Survey of Household Income and Wealth and variation from multiple pension reforms in Italy that reduced social security wealth of young workers while leaving benefits for existing retirees largely unchanged. The results indicate relatively little intergenerational risk sharing, though the empirical analysis is confounded by other adverse macroeconomic events and policy changes in the 1990s that may have differentially affected younger and older individuals. Further research on changes in specific intergenerational risk sharing mechanisms following social security reforms may yield valuable policy-relevant insights.

International Investment for Retirement Savers: Historical Evidence on Risk and Returns

by Gary Burtless
SSA Project # BC06-09 • International Research
Center for Retirement Research at Boston College Working Paper 2007-5

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An important decision facing retirement savers is how to allocate their savings across different assets. The decision includes the choice of how to divide investments between domestic and foreign holdings. This study uses return data for 1927–2005 to determine whether cross-border investing in the past would have been advantageous to retirement savers in eight large industrialized countries. By assumption investors can buy mutual fund shares in index funds for stocks and bonds in their home country and in any of seven foreign countries. The mutual funds' foreign holdings are not hedged to protect investors against currency fluctuations. The paper's goal is to determine whether workers in the eight countries would have obtained higher expected retirement incomes, with smaller risk of catastrophic investment shortfalls, if they invested part of their retirement savings in foreign stocks and bonds. Consistent with past theoretical and empirical findings, the results show that workers could have improved expected financial performance by investing in foreign as well as domestic equities. Remarkably, retirement savers in nearly all countries would have obtained higher average pensions with a 100 percent foreign allocation than with a 100 percent domestic allocation, even if they followed extremely naïve strategies in allocating equity investments across different foreign markets. For retirement savers in most countries, though not the United States, naïve overseas investment strategies would also have reduced the risk of catastrophically poor investment performance. In all countries, retirement savers who selected a global portfolio allocation along the efficient frontier could obtain better average pensions with lower risk of very small pensions than savers who restrict their investments to the domestic stock and bond funds.

Investor Behavior and Fund Performance under a Privatized Retirement Accounts System: Evidence from Chile

by Elena Krasnokutskaya and Petra Todd
SSA Project # UM09-17 • International Research
Michigan Retirement Research Center Working Paper 2009-209

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In the U.S. and in Chile, there have been heated debates about the relative merits of a decentralized privatized pension system relative to a more traditional social security system. On the firm side, there are concerns that pension funds engage in anticompetitive behavior and take advantage of consumers' by charging high fees and account maintenance changes. On the consumer side, there are concerns that consumers do not select wisely among funds and take on too much risk. Any pension system with insurance features to protect against low levels of pension accumulations is potentially subject to moral hazard problems, in the form of consumers' taking on too much risk. In the case of Chile, the government provides a minimum pension benefit to those with low pension accumulations, which can make some consumers more willing to take risks. For these reasons, the Chilean government introduced regulations on pension fund firms' investments designed to limit risk. This paper analyzes the determinants of consumers' choices of pension fund and of pension fund characteristics (performance and fees), taking into account governmental regulations. In particular, it estimates a demand and supply model of the pension fund investment market using a longitudinal household dataset gathered in 2002 and 2004 in Chile, administrative data on fund choices, and longitudinal data on cost determinants of pension funds. We find that the existing regulation actually increases the level of risk in the market, reduces heterogeneity across firms, and reduces incentives for consumers to participate in the pension fund program. We suggest alternative more effective forms of regulation.

Investor Decisions and the Financial Crisis in Mexico's Privatized Social Security Market

by Justine Hastings
SSA Project # NB10-03 • International Research
National Bureau of Economic Research

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(No abstract available.)

Labor Market and Immigration Behavior of Middle-Aged and Elderly Mexicans

by Emma Aguila and Julie Zissimopoulos
SSA Project # UM08-14 • International Research
Michigan Retirement Research Center Working Paper 2008-192

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In this study we analyzed the retirement behavior of Mexicans with migration spells to the United States that returned to Mexico and non-migrants. Our analysis is based on rich panel data from the Mexican Health and Aging Study (MHAS). Approximately 9 percent of MHAS respondents aged 50 and older reported having lived or worked in the United States. These return migrants were more likely to be working at older ages than non-migrants. Consistent with much of the prior research on retirement in the United States and other developed countries, Mexican non-migrants and return migrants were responsive to institutional incentives. Both groups were more likely to retire if they had publicly provided health insurance and pensions. In addition, receipt of U.S. Social Security benefits increased retirement rates among return migrants. Return migrants were more likely to report being in poor health and this also increased the likelihood of retiring. The 2004 draft of an Agreement on Social Security would coordinate benefits across United States and Mexico boundaries to protect the benefits of persons who have worked in foreign countries. The agreement would likely increase the number of authorized and unauthorized Mexican workers and family members eligible for Social Security benefits. The responsiveness of current, older Mexican return migrants to pension benefits, suggests that an Agreement would affect the retirement behavior of Mexican migrants.

A Matter of Trust: Understanding Worldwide Public Pension

by Kent Smetters and Walter Theseira
SSA Project # NB08-15 • International Research
National Bureau of Economic Research

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Fundamental reform of social security systems from traditional pay-as-you-go defined benefit systems toward defined-contribution accounts represents one of the most important fiscal policy changes worldwide during the past century. Current explanations of this phenomenon lack theoretical justification or empirical support. In fact, the traditional pension model is likely superior along several important dimensions. So why have so many countries reformed? Adding to this puzzle is that these reforms have taken on numerous shapes and sizes across the world, and typically have been larger in developing countries facing less severe demographic problems. We propose a simple model of "intergenerational trust" that is consistent with these stylized facts. Empirical analysis is provided that supports the basic tenets of the model.

Pension Buyouts: What Can We Learn From The UK Experience?

by Ashby H. B. Monk
SSA Project # BC09-17 • International Research
Center for Retirement Research at Boston College Working Paper 2009-19

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Managing (or at least slowing) the decline of private defined benefit (DB) pensions has been a top priority for US policymakers. Any market-related developments or regulatory changes that alter the provision or sustainability of private DB pensions in other countries are thus relevant to policy and worth understanding. One such development taking place in the United Kingdom, pension fund buyouts, has enjoyed measured success. A DB pension bulk buyout refers to a transaction in which a pension plan sponsor pays another company a fee to take over the assets and liabilities of the pension plan. Clearly such transactions are relevant to the provision and long-term sustainability of this institution. So, while the increasing popularity of these transactions is restricted to the UK, the market has garnered the attention of US financial services firms, plan sponsors and policymakers. This paper thus analyzes the growing market for DB pension buyouts in the UK and considers its implications for the US. It contributes to our understanding of the future prospects for employer sponsored defined benefit pensions, and how they will contribute to retirement income over time.
Using various qualitative methodologies, this paper traces the evolution of the buyout from a transaction for insolvent plan sponsors to a transaction for solvent plan sponsors with funded pensions. While certain types of solvent buyouts have fallen out of favor, such as non-insured buyouts, the paper concludes that buyouts of the insured variety have a bright future. The increasingly burdensome nature of the DB pension plan will sustain this market over the long-term.

Pension Reform in Mexico: The Evolution of Pension Fund Management Fees and their Effect on Pension Balances

by Emma Aguila, Michael Hurd and Susann Rohwedder
SSA Project # UM08-16 • International Research
Michigan Retirement Research Center Working Paper 2008-196

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In 1997 Mexico introduced Personal Retirement Accounts (PRAs) which, after a transition phase, will completely replace the pay-as-you-go (PAYG) system. We give a detailed overview of the relevant institutional framework, the market of PRA providers and how it has evolved since the 1997 reform. We use administrative data obtained from CONSAR, the regulatory agency of the PRA system to assess how pension fund management fees affect pension accumulations. We find that fees can drain up to a quarter of individuals' pension savings.

Political Risk and Discount Rates: Evidence from the Croatian Pension System

by Jeffrey R. Brown, Zoran Ivkovi?, and Scott Weisbenner
SSA Project # NB10-07 • International Research
National Bureau of Economic Research

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Many transactions between citizens and government—such as those related to the provision of future pension income—have an important inter-temporal element. In such settings, individuals may discount future cash flows more heavily if their confidence or trust in the government as the counter-party to the transaction is low. In this paper, we examine an economically meaningful choice faced by retirees in response to a Constitutional Court ruling over whether to accept a small, immediate pension payment or a stream of larger, delayed payments. Approximately 70 percent of retirees chose the more immediate payments, despite the fact that the deferred option provided a nominal internal rate-of-return in excess of 26 percent. We first document that these individual decisions are correlated in sensible ways with a wide range of covariates, including education, income, liquidity constraints, and longevity expectations. We then show that, even after controlling for such factors, individual choices are strongly influenced by their views about government policy parameters (e.g., inflation and exchange rate expectations), their overall confidence in government, as well as their views about the importance of receiving "the full amount owed" from the government. These findings indicate that a citizenry's confidence in government can have important implications for how citizens value future benefit promises.

The Response of Household Saving to the Large Shock of German Reunification

by Nicola Fuchs-Schundeln
SSA Project # BC07-S1 • International Research
Center for Retirement Research at Boston College Working Paper 2008-21

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German reunification was a large, unexpected shock for East Germans, with different economic consequences for different birth cohorts. Exploiting German reunification as a natural experiment, I analyze the validity of the life-cycle consumption model. In the empirical part, I derive three stylized features concerning the saving behavior of East vs. West Germans in the 1990s: (i) East Germans have higher saving rates than West Germans after reunification, (ii) this East-West gap in saving rates is increasing in the age of the birth cohort, and (iii) for every cohort, this gap is declining over time. The theoretical part investigates whether a comprehensive life cycle model can predict these three features. I find strong evidence in favor of rational, forward looking saving behavior. The precautionary saving motive is essential in replicating the features from the data.

Risk and Reward of International Investing for U.S. Retirement Savers: Historical Evidence

by Gary Burtless
SSA Project # BC06-09 • International Research
Center for Retirement Research at Boston College Working Paper 2006-25

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A crucial decision facing retirement savers is how to allocate their savings across broad investment classes, including the choice of how to divide investments between domestic and foreign holdings. This study investigates whether cross-border investing would have been advantageous to U.S. retirement savers in the past. The analysis is based on empirical evidence on asset returns in eight industrialized countries that have reliable historical time series data on stock and government bond returns. The goal is to determine whether U.S. workers would have obtained higher expected retirement incomes, with smaller risk of catastrophic investment shortfalls, if they invested part of their retirement savings in foreign stocks and bonds without hedging the currency risks of their overseas investments. The results show that workers could indeed have increased their expected pensions if they included unhedged foreign assets in their portfolio and if the portfolio were selected from one on the efficient frontier. Under many naïve investing strategies, however, increasing workers' allocation to overseas assets will not reduce the risk of catastrophically poor investment performance. The tabulations show that the risk of obtaining a very low pension replacement rate actually increases if workers allocate a sizeable percentage of their savings to overseas investments.

Social Security Reform and Male Labor Force Participation Around the World

by Jocelyn E. Finlay and Günther Fink
SSA Project # BC10-S2 • International Research
Center for Retirement Research at Boston College Working Paper 2011-12

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In this paper we analyze the effect of social security regime changes on labor force participation of 50–80-year-old men across and within 13 countries: Argentina, Austria, Brazil, Chile, France, Greece, Malaysia, Mexico, Panama, Portugal, South Africa, Spain, and the United States. Labor force participation of men aged 50–80 has declined dramatically since 1960, despite increases in life expectancy and the compression of morbidity. We use three variables to capture information regarding the social security regime: the social security tax rate as a fraction of the wage; the replacement rates as a fraction of the wage; and the delay incentive as a fraction of the wage. We find that the tax rate has an inconsistent effect on labor force participation rates across countries, but the replacement rate has a strong negative effect on labor force participation incentives. That is, a higher replacement rate will encourage men to retire. The delay incentive has a small positive effect on labor force participation. Stratifications by regions within France and the US show that within country variation in the labor market response to national social security regimes exists. We also stratify by education attainment and find that those with higher levels of education have a weaker labor market response to changes in the social security regime.

Social Security Rules and Labor Force Participation of Older Workers: Evidence from Chile

by Alejandra Cox Edwards and Estelle James
SSA Project # UM08-23 • International Research
Michigan Retirement Research Center Working Paper 2008-202

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Recent research has argued that incentives stemming from social security systems influence the worker's decision to retire. The experience of Chile, which radically changed its system in 1981, offers an opportunity to test this hypothesis. The new system tightened access to early pensions, replaced an actuarially unfair defined benefit plan with an actuarially fair defined contribution plan, exempted pensioners from the pension payroll tax and allowed widows to keep their own pension in addition to their survivor's benefit. Although the old system is being phased out, since 1981 the two systems have co-existed. Using probit analysis of the behavior of a retrospective sample of new and old system affiliates, we estimate the impact of the new social security rules on the probability of dropping out of the labor force, for older workers. We find large effects. Age of pensioning has been postponed. Labor force participation is much higher among affiliates of the new system compared with the old, especially for pensioners and women. This is not simply due to selection: Aggregate participation rates have increased as the new system's share of total affiliates has risen.

Sources of Support for Pension Reform: A Cross-National Perspective

by Michelle Dion and Andrew Roberts
SSA Project # BC07-S6 • International Research
Center for Retirement Research at Boston College Working Paper 2008-23

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Many accounts of pension politics assign primary importance to societal forces. In the well-known formulation, pensions are the "third rail" of politics: politicians cannot cut benefits without suffering electoral retribution. In addition, some see the preferences of business as a key determinant of pension policy. This study takes aim at this problem by exploring what factors lead citizens and firms to support public pension systems and various reform efforts. To answer these questions, we analyze a survey of individuals and firms in 20 countries from five continents regarding attitudes toward pensions conducted by the Oxford Institute of Aging and the HSBC Bank. We examine separately variation in individual and then firm preferences regarding the role of government in pension provision and pension reform options. Then, we compare the preferences of firms to those of individuals to identify the potential space available for policy reform. The main results from the analyses are three. First, there are large cross-national differences in preferences of both individuals and firms. Second, these cross-national differences are not well explained by conventional theories. Third, there is some but not overwhelming support for micro-level theories about the reasons for differences between firms and individuals.

The Welfare Cost of Asymmetric Information: Evidence from the U.K. Annuity Market

by Liran Einav, Amy Finkelstein, and Paul Schrimpf
SSA Project # NB07-16 • International Research
National Bureau of Economic Research Working Paper 13228

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Much of the extensive empirical literature on insurance markets has focused on whether adverse selection can be detected. Once detected, however, there has been little attempt to quantify its importance. We start by showing theoretically that the efficiency cost of adverse selection cannot be inferred from reduced form evidence of how "adversely selected" an insurance market appears to be. Instead, an explicit model of insurance contract choice is required. We develop and estimate such a model in the context of the U.K. annuity market. The model allows for private information about risk type (mortality) as well as heterogeneity in preferences over different contract options. We focus on the choice of length of guarantee among individuals who are required to buy annuities. The results suggest that asymmetric information along the guarantee margin reduces welfare relative to a first-best, symmetric information benchmark by about £127 million per year, or about 2 percent of annual premiums. We also find that government mandates, the canonical solution to adverse selection problems, do not necessarily improve on the asymmetric information equilibrium. Depending on the contract mandated, mandates could reduce welfare by as much as £107 million annually, or increase it by as much as £127 million. Since determining which mandates would be welfare improving is empirically difficult, our findings suggest that achieving welfare gains through mandatory social insurance may be harder in practice than simple theory may suggest.

Work Disability, Work, and Justification Bias in Europe and the U.S.

by Arie Kapteyn, James P. Smith and Arthur van Soest
SSA Project # UM09-15 • International Research
Michigan Retirement Research Center Working Paper 2009-207

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To analyze the effect of health on work, many studies use a simple self-assessed health measure based upon a question such as "do you have an impairment or health problem limiting the kind or amount of work you can do?" A possible drawback of such a measure is the possibility that different groups of respondents may use different response scales. This is commonly referred to as "differential item functioning" (DIF). A specific form of DIF is justification bias: to justify the fact that they don't work, non-working respondents may classify a given health problem as a more serious work limitation than working respondents. In this paper we use anchoring vignettes to identify justification bias and other forms of DIF across countries and socio-economic groups among older workers in the U.S. and Europe. Generally, we find differences in response scales across countries, partly related to social insurance generosity and employment protection. Furthermore, we find significant evidence of justification bias in the U.S. but not in Europe, suggesting differences in social norms concerning work.

Demographic Research

The Ability of Various Measures of Fatness to Predict Application for Disability Insurance

by Richard V. Burkhauser, John H. Cawley, and Maximilian Schmeiser
SSA Project # UM08-17 • Demographic Research
Michigan Retirement Research Center Working Paper 2008-185

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This paper compares a variety of measures of fatness (e.g. BMI, waist circumference, waist-to-hip ratio, percent body fat) in terms of their ability to predict application for Social Security Disability Insurance (DI). This is possible through a recent linkage of the National Health and Nutrition Examination Survey (NHANES) III to Social Security Administration (SSA) administrative records. Our results indicate that the measure of fatness that best predicts application for DI varies by race and gender. For white men, BMI consistently predicts future application for DI. For white women, almost all are consistently predictive. For black men, none predict application. For black women, waist circumference and waist-to-hip ratio are the only significant predictors of DI application. This variation across race and gender suggests that the inclusion of alternative measures of fatness in social science datasets should be considered, and that researchers examining the impact of fatness on social science outcomes should examine the robustness of their findings to alternative measures of fatness.

Accurately Measuring Health Over the Life Course

by Fabian Lange and Doug McKee
SSA Project # BC08-S3 • Demographic Research
Center for Retirement Research at Boston College Working Paper 2010-5

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This paper develops a new method of estimating rich, dynamic models of health based on multiple health measures available in the HRS. We apply these methods to investigate what generates the large socioeconomic gradient in health. Preliminary results suggest a large role for initial differences in health at age 50 that persist into old age.

Causes of Lagging Life Expectancy at Older Ages in the United States

by Samuel H. Preston, Jessica Ho, Dana A. Glei, and John R. Wilmouth
SSA Project # NB09-11 • Demographic Research
National Bureau of Economic Research

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Life expectancy in the United States fares poorly in international comparisons, primarily because of high mortality rates above age 50. This paper evaluates two prominent explanations of its poor performance. One explanation is a poor performance by the health care system. We find that, by standards of OECD countries, the US does well in terms of screening for cancer, survival rates from cancer, survival rates after heart attacks and strokes, and medication of individuals with high levels of blood pressure or cholesterol. We consider in greater depth mortality from prostate cancer and breast cancer, diseases for which effective methods of identification and treatment have been developed and where behavioral factors do not play a dominant role. We conclude that the low longevity ranking of the United States is not likely to be a result of a poorly functioning health care system. In the second part of the paper, we argue that the history of heavy cigarette smoking in the United States is a major factor in its poor ranking. For example, we estimate that male life expectancy at age 50 would be 2.8 years higher if smoking-attributable deaths were eliminated, while female life expectancy at age 50 would be 2.6 years higher. Removing smoking attributable deaths for all countries would improve the age-50 life expectancy ranking of US women from 17th (out of 20) to 7th; and the men's ranking from 14th to 9th.

Determinants and Consequences of Moving Decisions for Older Homeowners

by Esteban Calvo, Kelly Haverstick, and Natalia A. Zhivan
SSA Project # BC09-20 • Demographic Research
Center for Retirement Research at Boston College Working Paper 2009-16

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The lore on whether older Americans move is mixed. While the familiar stereotype is that retirees flock to Florida or Arizona, prior studies have found that their home equity rises modestly over time, suggesting that they tend to stay put. This paper examines moving trends, determinants, and consequences using the original cohort of the Health and Retirement Study (HRS). We find that a full 30 percent of homeowners in the HRS cohort move over the 1992–2004 period, but most moves occur close to home. Overall, two types of movers emerge from the analysis—those who affirmatively plan to move and those who react to changing circumstances. As proxies for these two types, this study uses the presence or absence of a negative shock, such as death of a spouse or entry into a nursing home. Our results show that the factors that help determine a move are similar for both groups, while the consequences of a move vary. Homeowners with shocks are more likely to discontinue homeownership and reduce net equity, supporting the hypothesis that households may view housing wealth as insurance against catastrophic events. Finally, while movers in both groups of home owners experience improvements in psychological well-being, movers with shocks are impacted most by the shocks themselves.

Does the Rise in the Full Retirement Age Encourage Disability Benefits Applications? Evidence from the Health and Retirement Study

by Xiaoyan Li and Nicole Maestas
SSA Project # UM08-21 • Demographic Research
Michigan Retirement Research Center Working Paper 2008-198

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This paper compares the fraction of retirement transitions through disability channel (defined as applying for DI) across birth cohorts with different full retirement age (FRA) in the Health and Retirement Study. After restricting the sample to retirement transitions made by people with work-limiting health problems and controlling for other observable variables that might affect DI application, we find that the rise in the FRA does encourage older people to increase their DI application rate conditional on retirement after they reach age 62.

Economic Well-Being of the Elderly Immigrant Population

by George J. Borjas
SSA Project # NB09-02 • Demographic Research
National Bureau of Economic Research

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The study uses microdata from the 1970–2000 decennial censuses, as well as the 2005–2007 American Community Surveys, to document and examine the trends in the economic well being of the elderly immigrant population. The key empirical finding of the analysis is that there has been a significant drop in the relative income of elderly immigrants in the past few decades. In 1970, the average income of elderly immigrants was only about 5 percent below that of elderly natives. By 2007, the income gap had widened to 30 percent. This study examines the immigrant-native gap in the various sources of income that determine the economic well being of the elderly population, including investment income, retirement benefits, and public assistance. The analysis finds that a crucial factor in generating the growing immigrant disadvantage is that immigrants are much less likely to receive retirement benefits than natives, either through the Social Security system or through private sources. Moreover, even among those immigrants who do receive retirement benefits, there is a sizable gap in the level of benefits received.

Elderly Immigrants' Labor Supply Response to Supplemental Security Income

by Neeraj Kaushal
SSA Project # BC07-S7 • Demographic Research
Center for Retirement Research at Boston College Working Paper 2008-25

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This paper examines the effect of changes in immigrant eligibility for Supplemental Security Income in 1996 on the employment and retirement behaviors of foreign-born elderly persons. I find that denial of SSI was associated with a 5 percentage point (15 percent) increase in the employment of non-citizen elderly men and a 5.6 percentage point (11 percent) decrease in their retirement rate. The estimated effects were higher for recent arrivals, a group most likely to be affected by the policy change. Further, while recent arrivals were more likely to increase part-time work, the earlier arrivals responded to the policy by increasing full-time employment. I find no consistent evidence that denial of SSI affected the employment of elderly immigrant women, but some evidence that it raised their retirement rate, specifically among those who immigrated in recent years.

Gain and Loss: Marriage and Wealth Changes Over Time

by Julie Zissimopoulos
SSA Project # UM09-19 • Demographic Research
Michigan Retirement Research Center Working Paper 2009-213

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Family composition has changed dramatically over the past 25 years. Divorce rates increased and remarriage rates declined. While considerable research established a link between marriage and earnings, far less is empirically understood about the effect of marriage on wealth although wealth is an important measure for older individuals because it represents resources available for consumption in retirement. In this paper we employ eight waves of panel data from the Health and Retirement Study to study the relationship between wealth changes and marital status among individuals over age 50. This research advances understanding of the relationship by first, incorporating measures of current and lifetime earnings, mortality risk and other characteristics that vary by marital status into models of wealth change; second, measuring the magnitude of wealth loss and gain associated with divorce, widowing and remarriage and third, estimating wealth change before and after marital status change so the change in wealth change is not the result of individuals entering or leaving the household and other sources of unobserved differences are removed from estimates of the effect of marriage on wealth. Our results suggest no differences in wealth change over time among individuals that remain married, divorced, widowed, never married and partnered over 7 years. In the short-run there are substantial wealth changes associated with marital status changes. Divorce at older ages is costly, remarriage is wealth enhancing and people appear to change their savings in response to changes in marital status.

Health and the Factors Driving Medical Spending

by David M. Cutler
SSA Project # NB06-14 • Demographic Research
National Bureau of Economic Research

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With the rising cost of health care already a major concern for government, employers and individuals, one might reasonably ask what the future holds. This paper reports on a multi-faceted research agenda on the factors that influence health and health care costs over time, and what they suggest for the future. It focuses on demographic trends, trends in health and health behaviors, and medical advances as key aspects to forecasting medical spending. Age demographics are important, because of an increasing older population and a substantially higher level of medical spending at older ages. On top of these demographic changes, however, are increases in the level of medical spending at each age, as medical capability advances over time. At the same time, there has been substantial evolution over time in health behaviors and risk factors, such as smoking, obesity, and control of hypertension and high cholesterol. These risk factor changes have had a mixed influence on health trends to date and, depending on how health behaviors continue to evolve in the future, could be fundamental to population health in the future. Forecasting medical advances is also difficult. While there have been major medical advances in medical innovation in recent years, most of which have improved health, some have done so with expensive technological care, and some have contained costs with more effective disease and risk management. While the paper makes no attempt to quantitatively integrate the various influences on future health care costs, it discusses in substantial detail the factors that influence costs, the quantitative evidence that has been compiled on these various trends and influences, and how one would structure an integrative forecasting model from these component pieces.

Housing Consumption in Late Life: The Role of Income, Health Shocks, and Marital Shocks

by Douglas A. Wolf and Janet M. Wilmoth
SSA Project # BC09-18 • Demographic Research
Center for Retirement Research at Boston College Working Paper 2010-10

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Past research has shown that income from the Social Security program has contributed to trends towards smaller households, greater residential independence—the tendency to live alone rather than with others—and a greater prevalence of home ownership late in life. However, the mechanism through which these associations operate has remained relatively unstudied. This paper addresses the possibility that Social Security income mediates the consequences of adverse events, whether "health shocks" such as a stroke or hip fracture, or "marital shocks," principally the death of a spouse. We measure housing consumption using the ratio of dwelling unit size (number of rooms) to number of household members—i.e., "rooms per person." We use panel data from the Health and Retirement Survey to model current housing consumption in relation to Social Security income as well as the occurrence of health and marital shocks over the two-year period preceding each survey year (1995; 2000; 2002; 2004; and 2006). We also use an instrumental-variables approach to deal with omitted-variables bias in the housing consumption equation, and include an additional control for selective loss from the sample due to entry into a nursing home. We find no effects of Social Security income on housing consumption once we control for selection and endogeneity, a result that contrasts sharply with past research findings. We also fail to find any evidence that Social Security mediates either health or marital shocks. However, we do find that health shocks, and to a lesser extent marital shocks, are strongly associated with both nursing home entry and changes in housing consumption.

How Do Lower-Income Families Think about Retirement?

by Helen Levy and Kristin S. Seefeldt
SSA Project # UM08-15 • Demographic Research
Michigan Retirement Research Center Working Paper 2008-195

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How do low-income households think about retirement? Do they think about retirement? If so, when do they think they will retire, and what is it they plan to live on? In this paper, we present evidence on these questions based on 51 qualitative interviews with low-income families in the Detroit area. We find that the great majority of low-income households think about retirement, although this does not necessarily mean they are able to plan and/or save actively for retirement. Most respondents plan to retire as soon as they become eligible for Social Security or, in a few cases, private pensions.

Immigrant-Native Fertility and Mortality Differentials in the United States

by Lucie Schmidt and Purvi Sevak
SSA Project # UM08-02 • Demographic Research
Michigan Retirement Research Center Working Paper 2008-181

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Immigrants have been discussed as a means of alleviating fiscal pressures on Social Security. Their long-term impact on the Social Security system depends critically on their fertility and mortality patterns. In this paper, we examine the fertility and mortality patterns of immigrants to the United States and compare these patterns with those of non-immigrants. We find that both the recent and cumulative fertility of immigrant women is higher than that of native-born women, but that a large share of these differentials can be "explained" by differences in age structures, race and ethnicity, years in the United States, and country of origin. Using a synthetic cohort approach, we examine the role of years in the United States in more detail, and find no evidence of assimilation towards native-born fertility patterns. Consistent with previous research, we find evidence of a disruption effect on fertility—the fertility of immigrant women in the most recent arrival cohorts is low, but increases at a faster rate relative to both the fertility of immigrants from earlier cohorts and relative to the fertility of natives. We find that immigrants experience lower mortality than native-born individuals in the United States, and these differences remain even after controlling for underlying differences in observable characteristics. However we find that they do not exhibit differences in their subjective expectations of their mortality.

Immigration and Labor Market Outcomes in the Native Elderly Population

by George J. Borjas
SSA Project # NB08-10 • Demographic Research
National Bureau of Economic Research

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A rapidly increasing fraction of the elderly workforce is foreign-born. This paper uses data drawn from the 1960–2000 censuses and the post-1994 Current Population Surveys to examine the impact of immigration on various economic outcomes in the native elderly population. The analysis suggests that immigration had a depressing effect on the wage of competing native workers, and induced substantial reductions in labor supply and increases in retirement propensities in the native elderly population. The data also suggest that conditions in the labor market for elderly workers exhibit "excess sensitivity" to immigration-induced supply shifts. The wage elasticity typically found in national-level studies of the impact of immigration on the overall labor market lies around -0.3 or -0.4 (in other words, a 10-percent immigration induced supply shift in the size of a particular skill group lowers the wage of that group by 3 or 4 percent). In contrast, the wage elasticity in the elderly workforce seems to be twice as high. As a result, immigration had correspondingly large effects on the time allocation of elderly persons. A 10-percent immigration-induced increase in the size of the workforce lowers the employment rate of elderly men by 7 percentage points and increases the probability of receiving Social Security benefits by 6 percentage points.

Impact of Immigration on the Distribution of American Well-Being

by Gary Burtless
SSA Project # BC09-19 • Demographic Research
Center for Retirement Research at Boston College Working Paper 2009-34

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Changes in the net immigration rate and in the age distribution and skills of immigrants have important effects on the average age and skill mix of the population. In the short run increases in immigration boost the number of workers and aggregate earnings and reduce the ratio of elderly to non-elderly. This paper examines the impact of U.S. immigration since 1980 on trends in wages and income and the relative incomes of young and old. It simulates the wage and income distributional impacts of a reduced flow of immigrants into the United States. Even ignoring the possible spillover effects of immigrant labor supply on the wages earned by natives, the average wage of working Americans has slipped as a result of an increased number of low wage workers from abroad. Immigrants arriving after 1979 reduced the average annual wage by 2.3 percent in 2007. The slowdown in wage growth affects the growth of Social Security benefits. For workers attaining age 62 in 2007, the basic Social Security benefit would have been about 1.8 percent higher if the average wage had risen at the rate observed among native workers and immigrants who entered the U.S. before 1980 rather than among all resident workers, including workers who entered after 1979. Immigration since 1980 has also reduced U.S. household incomes and increased income inequality. Policies that reduce the inflow of immigrants or increase the average skills of new entrants would boost household income. If the flow of adult immigrants who have less than a high school education had been reduced by half after 1979, median income in 2006 would have been 1.8 percent higher and average income would have been 1.2 percent higher than the levels actually observed. The effects of this policy would have been significantly greater in the case of young working-age families; they would have been smaller in the case of households with a family head older than 65. On balance, immigration since 1980 has reduced the relative incomes of working-age residents compared with those of the population past 65.

Insult to Injury: Disability, Earnings, and Divorce

by Perry Singleton
SSA Project # BC08-S7 • Demographic Research
Center for Retirement Research at Boston College Working Paper 2009-25

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This study examines the effect of work-limiting disabilities on the likelihood of divorce. Theoretically, the effect depends on the disability hazard at the time of onset and the impact of disability on marital value. The theory therefore implies, based on a set of empirically-supported premises, that the effect of disability on divorce should decrease with age, increase with education, and increase with disability severity. Data from the Survey of Income and Program Participation support these predictions. The effect of a work-preventing disability is greatest among young, educated males, increasing the divorce hazard by 13.3 percentage points.

Interactions in the Labor Market Behavior of Couples over the Life Course

by Chinhui Juhn and Simon Potter
SSA Project # NB08-03 • Demographic Research
National Bureau of Economic Research

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Using the matched March Current Population Surveys for 1968–2007 we examine the extent to which husbands and wives coordinate their labor supply over different stages in the life cycle. We examine within couple correlations in year-to-year changes in weeks and annual hours worked. We find that correlations of couples' labor supply changes substantially rise with age, consistent with the notion that couples' time at home are substitutes during child-bearing ages, but are complements at older ages. We also find that labor supply changes have become more positively correlated with each successive birth cohort as participation rates of married men and women converged. The exception appears to be the youngest aged couples of the post Baby Boom cohort for whom husbands' and wives' hours strongly negatively co-vary upon birth of a child.

The Long-Term Effects of the Divorce Revolution: Health, Wealth, and Labor Supply

by Kristin Mammen
SSA Project # BC07-S4 • Demographic Research
Center for Retirement Research at Boston College Working Paper 2008-22

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The effects of divorce on individuals and on society as a whole has been widely debated in public discussion of American life. The dialogue was sparked by the dramatic rise in the number of U.S. divorces which began in the 1960s: Figure 1 illustrates that the divorce rate doubled from 10.6 to 20.3 divorces per 1,000 married women between 1965 and 1975, and continued to rise until 1981. Scholars have also debated the implications of the 'Divorce Revolution' of this time period: the liberalization of divorce laws in a large number of states to a unilateral regime, which made divorce easier by requiring the consent of only one spouse to dissolve a marriage (e.g., Friedberg 1998, Weitzman 1995). Some policymakers, social scientists, and advocacy groups have argued that this sweeping policy change was an important factor in a general decline of the American family (e.g., Kirkwood 1996, Parkman 1993). Gruber (2004) found that children exposed to the unilateral divorce laws have poorer outcomes in young adulthood. On the other hand, the easing of divorce laws made it easier for people to leave toxic marriages, and arguably increased the bargaining power of abused partners within marriages; Stevenson and Wolfers (2006) find large declines in domestic violence in states that adopted unilateral divorce. This paper contributes to the evaluation of the change in divorce laws by examining a less studied area: the long term effects of this policy change on the well-being of men and women who were young adults when the laws were changing. This paper will examine laterlife measures including labor force status, earnings, wealth, and physical and mental health for these cohorts. This long term evaluation is important because this generation of Americans is now approaching and just beginning the retirement years. The aging of the population and the demands it will place on social service programs and future generations of workers is already an important topic for social scientists and policy makers (He et al. 2005). Understanding whether the wellbeing of cohorts affected by the divorce law changes differs from earlier retirees' will aid in this planning.

Low Life Expectancy in the United States: Is the Health Care System at Fault?

by Samuel Preston and Jessica Ho
SSA Project # NB09-11 • Demographic Research
National Bureau of Economic Research Working Paper 15213

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Life expectancy in the United States fares poorly in international comparisons, primarily because of high mortality rates above age 50. Its low ranking is often blamed on a poor performance by the health care system rather than on behavioral or social factors. This paper presents evidence on the relative performance of the US health care system using death avoidance as the sole criterion. We find that, by standards of OECD countries, the US does well in terms of screening for cancer, survival rates from cancer, survival rates after heart attacks and strokes, and medication of individuals with high levels of blood pressure or cholesterol. We consider in greater depth mortality from prostate cancer and breast cancer, diseases for which effective methods of identification and treatment have been developed and where behavioral factors do not play a dominant role. We show that the US has had significantly faster declines in mortality from these two diseases than comparison countries. We conclude that the low longevity ranking of the United States is not likely to be a result of a poorly functioning health care system.

Marital Histories and Economic Well-Being

by Ben Karney, Amy Rauer, and Julie Zissimopoulos
SSA Project # UM08-10 • Demographic Research
Michigan Retirement Research Center Working Paper 2008-180

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Compared to unmarried individuals married individuals report greater average wealth. A restricted focus on current marital status risks misrepresenting the effects of marriage on wealth, as an increasing proportion of older adults have been divorced and remarried, having lived through the dramatic upheavals in family structure from the 1960s through the 1980s. To shed light on the associations between a lifetime of marriage events and wealth near retirement, we used panel data from the Health and Retirement Study and developed categories of marital experiences that acknowledged current status, type, number and date of past marital disruptions and total duration of time spent married across the lifespan. We found that the route individuals took to get to their current marital status were important predictors of wealth levels near retirement and were different for males and females. Observable differences in lifetime earnings, mortality risk, risk aversion, other characteristics such as education and number of children, explained much of the wealth difference between married and remarried individuals however neither observable characteristics nor sources of other wealth from pensions and Social Security were enough to explain the large differences in wealth accumulation between single and married women and individuals experiencing more than one marital disruption. Given the higher divorce rate, prevalence of multiple divorces and earlier age of divorce of the Baby Boomer cohort compared to earlier cohorts, an understanding of how marriage disruptions over the lifecycle impact savings is increasingly important for understanding the economic security of retirees.

A Parsimonious Choquet Model of Subjective Life Expectancy

by Alexander Ludwig and Alexander Zimper
SSA Project # BC07-S3 • Demographic Research
Center for Retirement Research at Boston College Working Paper 2008-20

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This paper develops and estimates a closed-form model of Bayesian learning of subjective survival beliefs within the framework of Choquet decision theory. Data from the Health and Retirement Study (HRS) indicate that, on average, young respondents underestimate their true survival probability whereas old respondents overestimate their survival probability. Such subjective beliefs violate the rational expectations paradigm and are also not in line with the predictions of the rational Bayesian learning paradigm which implies convergence of subjective to underlying 'objective' probabilities. Based on the assumption of non-additive beliefs, we therefore introduce a model of Bayesian learning which combines rational learning with the possibility that the interpretation of new information is prone to psychological attitudes. We estimate the parameters of our theoretical model by pooling the HRS data. Despite a parsimonious parametrization we find that our Choquet model results in a remarkable fit to the average subjective beliefs expressed in the data.

Proximity and Coresidence of Adult Children and their Parents: Description and Correlates

by Janice Compton and Robert A. Pollak
SSA Project # UM09-18 • Demographic Research
Michigan Retirement Research Center Working Paper 2009-215

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The ability of family members to engage in intergenerational transfers of hands-on care requires close proximity or coresidence. In this paper we describe and analyze the patterns of proximity and coresidence involving adult children and their mothers using data from the National Survey of Families and Households (NSFH) and the U.S. Census. Although intergenerational coresidence has been declining in the United States, most Americans live within 25 miles of their mothers. In both the raw data and in regression analyses, the most robust predictor of proximity of adult children to their mothers is education. Individuals are less likely to live near their mothers if they have a college degree. Virtually all previous studies have considered coresidence alone, or else treat coresidence as a limiting case of close proximity. We show that this treatment is misleading. We find substantial differences in the correlates of proximity by gender and marital status, indicating the need to model these categories separately. Other demographic variables such as age, race and ethnicity also affect the probability of coresidence and close proximity, but characteristics indicating a current need for transfers (e.g., disability) are not correlated with close proximity.

Regional Variations in Medicare Expenditures for the SSDI Population

by Thomas Bubolz and Jonathan Skinner
SSA Project # NB08-04 • Demographic Research
National Bureau of Economic Research

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Enrollment in Social Security's Disability Insurance program (SSDI) is increasing rapidly, resulting in dramatic growth in overall Medicare costs, from 13 percent of old-age spending in 1990 to 20 percent in 2005. At the same time, per-enrollee Medicare costs for the disabled grew in real 2005 dollars from $4,232 in 1990 to $7,406 in 2005. We don't know why costs have grown so rapidly. In the elderly population, surgical treatments for cardiac illnesses are a large component of rapid cost growth, but one might expect a much smaller role for cardiac disease in the under-65 population, particularly given the rising share of SSDI enrollees with musculoskeletal diseases and mental illness. This project will explore the increasing health care costs of SSDI enrollees, using geographic variation in expenditures as a mechanism for identifying factors leading to cost growth.

Will People Be Healthy Enough to Work Longer?

by Alicia H. Munnell, Mauricio Soto, and Alex Golub-Sass
SSA Project # BC08-12 • Demographic Research
Center for Retirement Research at Boston College Working Paper 2008-11

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If Americans continue to retire at age 63, a great many will risk income shortfalls especially at older ages. Because work directly increases current income, Social Security benefits, retirement saving, and decreases the length of retirement, a logical solution would be to increase the age of retirement. But are Americans healthy enough to work longer? Using the National Health Interview Study, this paper shows that healthy life expectancy increased by about three years over 1970–2000 for the average 50-year old man. This increase is largely the result of men moving up the education ladder, with minimal increases within educational groups. Moreover, major disparities in healthy life expectancy remain between those in the bottom and top quartiles of the population. And these disparities mean that a vulnerable portion of the population—perhaps those who most need to work longer—might not be able to extend their work lives.